Principles of Small Business Management International Edition 5th Edition by Timothy S. Hatten- Test Bank

Principles of Small Business Management International Edition 5th Edition by Timothy S. Hatten- Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

chapter 5

Franchising

True/False Questions

1. T F    A disadvantage of the direct ownership system used by early manufacturers in the 1830s like McCormick and Singer was the lack of direct control and control over quality levels.

Ans:  False       LO:  1       Page:  109                  AACSB:  Analytic

2. T F    Franchising dominates the fast-food, automobile, and lodging segments of the U.S. economy.

Ans:  True       LO:  1       Page:  109                   AACSB:  Analytic

3. T F    McCormick and Singer were two of the first franchises in America during the 1800s.

Ans:  True      LO:  1       Page:  109   AACSB:  Analytic

4. T F    Franchised businesses directly produce almost 6 million jobs.

Ans:  False      LO:  1       Page:  110  AACSB:  Analytic

5. T F    Nearly 50 percent of all U.S. businesses are franchised.

Ans:  False       LO:  1       Page:  110                 AACSB:  Analytic

6. T F    Most of the franchises in the United States operate in the retail food sector.

Ans:  False       LO:  1       Page:  111                 AACSB:  Analytic

7. T F    Making products available to consumers through exclusive dealers in a specific geographic region is the purpose of product-distribution franchising.

Ans:  True       LO:  2       Page:  111                   AACSB:  Analytic

8. T F    Product-distribution franchising is commonly used in fast-food restaurants and lodging establishments, such as hotel and motel chains.

Ans:  False       LO:  2       Page:  111                 AACSB:  Analytic

9. T F    In comparison to business-format franchising, product-distribution franchising is more of a turnkey approach to franchising.

Ans:  False       LO:  2       Page:  111 AACSB:  Analytic

10. T F    The biggest advantage of franchising for a franchisee is the marketing expertise that is provided.

Ans:  False       LO:  3       Page:  112                  AACSB:  Analytic

11. T F    Some franchisors prefer that their franchisees not have experience in the particular field of the franchise.

Ans:  True       LO:  3       Page:  113                   AACSB:  Analytic

12. T F    Local franchisees share in the advertising costs spent by the franchisors when advertising nationally and/or regionally.

Ans:  True       LO:  3       Page:  112                   AACSB:  Analytic

13. T F    Franchisors seldom provide financial resources for startup and working capital for inventory.

Ans:  False       LO:  3       Page:  112                  AACSB:  Analytic

14. T F    The primary drawback of franchising to the franchisee is that you must give up some control, some decision-making power, and some freedom.

Ans:  True      LO:  3       Page:  113   AACSB:  Analytic

 

 

15. T F    One advantage of franchising to the franchisee is that it is relatively easy to terminate a franchise agreement if things are not going well.

Ans:  False      LO:  3       Page:  115  AACSB:  Analytic

16. T F    If a franchisee feels that a product, promotion, or policy may not be appropriate for his/her area, the franchisee can decide to not participate.

Ans:  False       LO:  3       Page:  114                  AACSB:  Analytic

17. T F    A right of first denial states that a franchisee must decline continuing a franchise agreement before the franchisor can offer the franchise to someone else.

Ans:  False       LO:  3       Page:  115                  AACSB:  Analytic

18. T F    From the perspective of the franchisor, one of the biggest advantages of offering franchises is the expansion of the business happening much faster than if the franchisor were in business alone.

Ans:  True       LO:  3       Page:  115                   AACSB:  Analytic

19. T F    Franchisors often have several sources of income built into franchise agreements, including franchise fees, operating revenue percentages, and product/supplies revenues.

Ans:  True       LO:  3       Page:  115                   AACSB:  Analytic

20. T F    One way in which franchisors have dealt with the complexity of serving differing customer tastes covering large geographic areas is through company owned franchises.

Ans:  True       LO:  3       Page:  116                   AACSB:  Analytic

21. T F    Trade associations such as the International Franchise Association can be a good source for industry-wide data as well as company-specific data.

Ans:  True       LO:  4       Page:  117                   AACSB:  Analytic

22. T F   The American Franchise Association is a trade association that provides information and services about franchising.

Ans:  True     LO:  4       Page:  117    AACSB:  Analytic

23. T F    When individuals have a general idea of the franchise that they are interested in, they should contact the company and ask for a copy of its disclosure statement.

Ans:  True      LO:  4       Page:  119   AACSB:  Analytic

24. T F    A good question to ask concerning a potential franchise purchase is whether or not the franchise gives exclusive territory for the length of the agreement.

Ans:  True       LO:  4       Page:  120                   AACSB:  Analytic

25. T F    Because franchisors have lawyers look over the franchise agreement, it is not necessary for a franchisee to pay a lawyer to do the same thing.

Ans:  False       LO:  4       Page:  120                 AACSB:  Analytic

26. T F    A potential franchisee may receive only partial use of trademarks, trade names, logos, and other symbols as detailed in the disclosure statement.

Ans:  False       LO:  4       Page:  123                  AACSB:  Analytic

27. T F    Royalty fees that are paid to the franchisor are usually calculated as a percentage of gross profits.

Ans:  False       LO:  4       Page:  124                  AACSB:  Analytic

28. T F    If an advertising fee is charged to a franchisee, the franchisor is required by law to spend a percentage of the collected fees in the franchisee’s market.

Ans:  False       LO:  4       Page:  124                  AACSB:  Analytic

29. T F    Franchise agreements are currently written in simple enough language that a lawyer need not be contacted before signing a franchise agreement.

Ans:  False       LO:  4       Page:  124                  AACSB:  Analytic

30. T F    Over the past 25 years, the wording within disclosure statements has gradually become more “legalese” and complex.

Ans:  False      LO:  4       Page:  124  AACSB:  Analytic

31. T F    The issue of exclusive territory is the subject of much controversy in the franchising world.

Ans:  True      LO:  4      Page:  125    AACSB:  Analytic

32. T F    U.S. companies facing increased domestic competition are turning to foreign markets such as Canada and Mexico for expansion opportunities.

Ans:  True       LO:  5       Page:  126                   AACSB:  Diversity

33. T F    When expanding abroad, franchisors must be sensitive to the demographic, cultural, and legal climates of the host country.

Ans:  True       LO:  5       Page:  126                   AACSB:  Diversity

34. T F    With the passage of the North American Free Trade Agreement (NAFTA), franchise opportunities in South America have become a dominant force in the retailing sector.

Ans:  False       LO:  5       Page:  126 AACSB:  Analytic

 

Multiple-Choice Questions

35. The process of gathering and verifying the accuracy of information included in the franchise agreement and all other information provided by the franchisor is called
36. a) Deductive reasoning
37. b) Preemptory investigation
38. c) Due diligence
39. d) Market research

Ans:  c       LO:  4       Page:  125          AACSB:  Analytic

36. Through the franchise agreement, the ________ gains the benefit of the parent company’s expertise, experience, management systems, marketing, and financial help.
37. a) Franchisor
38. b) Franchisee
39. c) Leaser
40. d) Lessee

Ans:  b       LO:  1       Page:  109          AACSB:  Analytic

37. A contractual license to operate an individually owned business as a part of a larger chain is known as a/an
38. a) Franchise
39. b) Small business contract
40. c) Chain contract
41. d) Import contract

Ans:  a       LO:  1       Page:  109          AACSB:  Analytic

38. The parent company that develops a product or business process and sells the rights is known as the
39. a) Franchisor
40. b) Franchisee
41. c) Company of origin
42. d) Opening company

Ans:  a       LO:  1       Page:  109          AACSB:  Analytic

39. The small business person who purchases the franchise in order to sell the product or service is known as the
40. a) Franchisor
41. b) Franchisee
42. c) Company of origin
43. d) Opening company

Ans:  b       LO:  1       Page:  109          AACSB:  Analytic

40. Franchises have experienced growth since the 1950s, although they have existed since the
41. a) Late 1700s
42. b) Early 1800s
43. c) Late 1800s
44. d) Early 1900s

Ans:  b       LO:  1       Page:  109          AACSB:  Analytic

41. In 2010, which famous franchise business took the top spot on the Entrepreneur Franchise 500 list?
42. a) Starbucks
43. b) McDonalds
44. c) Subway
45. d) Burger King

Ans:  c       LO:  1       Page:  108         AACSB:  Analytic

42. Samuel has decided to buy a small pretzel shop, where he will be expected to pay fees and royalties for exclusive rights to local distribution of pretzels made at the shop. Samuel can best be described as a/an
43. a) Franchisor
44. b) Franchisee
45. c) CEO
46. d) Social entrepreneur

Ans:  b       LO:  1       Page:  109         AACSB:  Reflective Thinking

43. According to the 2010 Franchise Business Economic Outlook, in total, franchised businesses support over _________ jobs.
44. a) 2 million
45. b) 6 million
46. c) 18 million
47. d) 32 million

Ans:  c       LO:  1       Page:  110         AACSB:  Analytic

44. ________ and ________ were two of the first businesspeople to use exclusive agents, which laid the ground for today’s franchising.
45. a) Ford, Hoover
46. b) John Deere, Macy’s
47. c) McDonald’s, Hilton
48. d) McCormick, Singer

Ans:  d       LO:  1       Page:  110          AACSB:  Analytic

45. Today, franchising is represented in almost every industry, with more than ________ U.S. businesses being franchises.
46. a) 225,000
47. b) 909,000
48. c) 5 million
49. d) 25 million

Ans:  b       LO:  1       Page:  110          AACSB:  Analytic

46. Franchised businesses directly produce almost __________ jobs.
47. a) 1 million
48. b) 32 million
49. c) 5 million
50. d) 18 million

Ans:  d       LO:  1       Page:  110          AACSB:  Analytic

47. Product-distribution franchising involves licensing the use of its
48. a) Trade name
49. b) Business format
50. c) Turnkey
51. d) Dealership

Ans:  a       LO:  2       Page:  111          AACSB:  Analytic

48. Making products available to consumers in a specific geographic region is the purpose of ________ franchising.
49. a) Product-distribution
50. b) Business format
51. c) Turnkey
52. d) Dealership

Ans:  a       LO:  2       Page:  111          AACSB:  Analytic

49. A type of franchise in which the franchisee agrees to purchase the products of the franchisor or use the franchisor’s name is called
50. a) Product-distribution franchise
51. b) Business-format franchise
52. c) Dealership franchise
53. d) Logo franchise

Ans:  a       LO:  2       Page:  111          AACSB:  Analytic

50. Product franchises and business-format franchises are used by all but which of the following groups?
51. a) Producers
52. b) Wholesalers
53. c) Retailers
54. d) Manufacturers

Ans:  d       LO:  2       Page:  110          AACSB:  Analytic

51. A type of franchise in which the franchisee adopts the franchisor’s entire method of operation is known as
52. a) Product franchising
53. b) Trade-name franchising
54. c) Business-format franchising
55. d) Dealership franchising

Ans:  c       LO:  2       Page:  111          AACSB:  Analytic

52. According to the pie-chart figure in the text, what industry type accounted for the highest percentage of franchises?
53. a) Business services
54. b) Lodging
55. c) Personal services
56. d) Real estate

Ans:  a       LO:  1       Page:  111          AACSB:  Analytic

53. Business-format franchising is commonly used in which of the following?
54. a) Gasoline stations
55. b) Soft-drink bottlers
56. c) Car dealerships
57. d) Fast-food restaurants and lodging establishments

Ans:  d       LO:  2       Page:  111          AACSB:  Analytic

54. Tom has opened a Ford dealership, where he purchases vehicles from the Ford Company and has full use of the Ford trade name, brand names, and logos to promote the dealership. Tom has engaged in what type of franchising?
55. a) Product-distribution
56. b) Service-distribution
57. c) Manufacturing-format franchising
58. d) Business-plan franchising

Ans:  a       LO:  2       Page:  111        AACSB:  Reflective Thinking

 

 

55. While traveling across country over the summer, Gwen and Audrey stayed in well-known, franchised accommodations rather than opting for independent, unknown motels. This example demonstrates which advantage to franchisees?
56. a) Efficiency
57. b) Financial assistance
58. c) Professional guidance
59. d) Proven product

Ans:  d       LO:  3       Page:  112        AACSB:  Reflective Thinking

56. An advantage of franchising for the franchisee would be all but which of the following?
57. a) Product readiness
58. b) Marketing experience
59. c) Efficiency
60. d) Cost of the franchise

Ans:  d       LO:  3       Page:  112          AACSB:  Analytic

57. The greatest benefit to the franchisee is which of the following?
58. a) Product readiness
59. b) Marketing expertise
60. c) Professional guidance
61. d) Efficiency

Ans:  a       LO:  3       Page:  112          AACSB:  Analytic

58. Providing a source of managerial and technical assistance is an advantage to the franchisee that might not be available to an independent business owner. This is called
59. a) An opportunity to learn
60. b) Market expertise
61. c) Professional guidance
62. d) Controlled expansion

Ans:  c       LO:  3       Page:  113          AACSB:  Analytic

59. Technical assistance available to franchisees could include all but which of the following?
60. a) Store layout and design
61. b) Location analysis
62. c) Purchasing assistance
63. d) Advertising campaigns

Ans:  d       LO:  3       Page:  113          AACSB:  Analytic

60. Saving money on inventory needs, equipment, and supplies is an advantage for the franchisee that is called
61. a) Recognized standards
62. b) Marketing expertise
63. c) Efficiency
64. d) Professional guidance

Ans:  c       LO:  3       Page:  113          AACSB:  Analytic

61. A McDonald’s hamburger that tastes the same at any location in the world is an example of which of the following benefits to the franchisee?
62. a) Recognized standards
63. b) Marketing expertise
64. c) Efficiency
65. d) Professional guidance

Ans:  a       LO:  3       Page:  113          AACSB:  Reflective Thinking

62. _______ franchisors will charge a fee and/or a specified percentage of sales revenue.
63. a) A few
64. b) Some
65. c) Most
66. d) All

Ans:  d       LO:  3       Page:  114          AACSB:  Analytic

63. A problem with the cost of purchasing a franchise is that the franchisee is usually required to raise most of the capital
64. a) Before beginning operations
65. b) Within one month of beginning operations
66. c) Within six months of beginning operations
67. d) Within one year of beginning operations

Ans:  a       LO:  3       Page:  114          AACSB:  Analytic

64. Which of the following companies has the highest franchise fee?
65. a) McDonalds
66. b) Subway
67. c) Jiffy Lube
68. d) Gold’s Gym

Ans:  a       LO:  3       Page:  114        AACSB:  Analytic

65. Because customers view franchises as an entire unit, which of the following can have a negative effect on a franchisee’s business?
66. a) Overdependence or unsatisfied expectations
67. b) Risk of fraud or misunderstanding
68. c) Problems of termination or transfer
69. d) Poor performance of other franchisees

Ans:  d       LO:  3       Page:  115        AACSB:  Analytic

66. From the perspective of the _________, the biggest advantage is the expansion of distribution sources with limited equity investments.
67. a) Customer
68. b) Employee
69. c) Franchisor
70. d) Franchisee

Ans:  c       LO:  3       Page:  115         AACSB:  Analytic

67. Other franchises under the same franchisor can detrimentally affect a franchise by
68. a) Tolerating substandard performance
69. b) Opening a new franchise in another market
70. c) Setting higher standards
71. d) Not making a profit

Ans:  a       LO:  3       Page:  115          AACSB:  Analytic

68. A statement in the franchise agreement that states that the franchisee must decline to continue the agreement before the franchisor can offer the franchise to someone else is called a
69. a) Right of discontinuance
70. b) Privilege of rescission
71. c) Right of first refusal
72. d) Right of denial

Ans:  c       LO:  3       Page:  115          AACSB:  Analytic

69. An advantage to the franchisor is all but which of the following?
70. a) Multiple sources of revenue
71. b) Expansion with smaller capital investment
72. c) Bulk purchasing
73. d) Profit sharing

Ans:  d       LO:  3       Page:  115          AACSB:  Analytic

70. From the perspective of the franchisor, the biggest advantage of offering franchises is the
71. a) Expansion with limited equity investments
72. b) Multiple sources of revenue
73. c) Level of control of expansion
74. d) Bulk purchasing

Ans:  a       LO:  3       Page:  115          AACSB:  Analytic

71. Franchising may be the only viable way for which of the following to expand?
72. a) Sole proprietorships
73. b) Businesses with limited capital
74. c) Businesses wishing to enter international markets
75. d) Partnerships

Ans:  b       LO:  3       Page:  115          AACSB:  Analytic

72. A source of revenue that could be built into the franchise agreement might include all but which of the following?
73. a) Franchise fee
74. b) Percentage of gross operating revenues
75. c) Revenue from selling necessary products and supplies to the franchisee
76. d) Interest income

Ans:  d       LO:  3       Page:  115          AACSB:  Analytic

73. In comparison with expansion of a corporate chain, expanding via franchise can be accomplished with a/an ________ management structure.
74. a) Simpler
75. b) Equally complex
76. c) Slightly more complex
77. d) Highly complex

Ans:  a       LO:  3       Page:  116          AACSB:  Analytic

74. Which of the following can significantly reduce costs for a franchisee and thus increase profit margins?
75. a) Controlled expansion
76. b) Franchise fees
77. c) Bulk purchasing
78. d) Advertising costs

Ans:  c       LO:  3       Page:  116          AACSB:  Analytic

75. The biggest disadvantage to the franchisor is which of the following?
76. a) Profit sharing
77. b) Disputes with franchisees
78. c) Loss of control
79. d) Communication breakdowns

Ans:  c       LO:  3       Page:  116          AACSB:  Analytic

76. Which of the following is a way in which franchisors have adapted products to meet the changing needs of customers?
77. a) Multiproduct shelving
78. b) Corporate displays
79. c) Establishing company-owned stores
80. d) Family branding

Ans:  c       LO:  3       Page:  116          AACSB:  Analytic

77. Franchisors can achieve economies of scale as a result of which of these?
78. a) Multiple sources of revenue
79. b) Controlled expansion
80. c) Motivated franchisees
81. d) Bulk purchasing

Ans:  d       LO:  3       Page:  116        AACSB:  Analytic

78. Which of the following is the least likely cause of dispute between franchisees and franchisors?
79. a) Payment of fees
80. b) Types of products or services offered
81. c) Expansion
82. d) Hours of operation

Ans:  b       LO:  3       Page:  116        AACSB:  Analytic

79. The major trade association of franchising is the
80. a) International Franchise Association
81. b) American Franchise Association
82. c) American Association of Franchises and Dealers
83. d) Global Franchise Association

Ans:  a       LO:  4       Page:  117          AACSB:  Analytic

80. The International Franchise Association publishes ______________ annually, which gives requirements, expectations, and assistance capabilities for each franchise.
81. a) The Franchise Handbook
82. b) Current Franchises in Business
83. c) Potential Franchise Opportunities
84. d) The Franchisee Guide to Selecting a Franchise

Ans:  a       LO:  4       Page:  117          AACSB:  Analytic

81. All of the following are questions that should be answered to determine whether franchising is the appropriate route to small business ownership except
82. a) Are you prepared to give up some independence?
83. b) Do you believe you have the skills to work smoothly with a franchisor?
84. c) Are you ready to make a short-term commitment to working with a franchisor?
85. d) Are you financially prepared to purchase the franchise?

Ans:  c       LO:  4       Page:  117         AACSB:  Analytic

82. The American Association of Franchisees and Dealers (AAFD) has developed a ________ as a code of ethical business conduct for franchised businesses.
83. a) Franchisee Bill of Rights
84. b) Franchisor Code of Conduct
85. c) Franchisee Constitution
86. d) Franchisor Disclosure Statement

Ans:  a      LO:  4       Page:  117          AACSB:  Ethics

83. A priceless source of information about a prospective franchise that cannot be obtained from trade associations or from the franchisor can come from which of the following?
84. a) Legal records
85. b) Current and former franchisees
86. c) The franchisor
87. d) Current customers

Ans:  b       LO:  4       Page:  119          AACSB:  Analytic

84. Franchisors are required by the ________ to provide disclosure statements to prospective or actual franchisees.
85. a) North American Free Trade Agreement
86. b) Uniform Commercial Code
87. c) National Labor Relations Act
88. d) Federal Trade Commission

Ans:  d       LO:  4       Page:  121          AACSB:  Analytic

85. Information that franchisors are required to provide to potential franchisees is contained in which of the following documents?
86. a) Franchise agreement
87. b) Purchasing contract
88. c) Disclosure statement
89. d) Profit-and-loss statement

Ans:  c       LO:  4       Page:  121          AACSB:  Analytic

86. Disclosure statements identify and provide information on ________ important items.
87. a) 10
88. b) 20
89. c) 30
90. d) 40

Ans:  b       LO:  4       Page:  121          AACSB:  Analytic

87. Identification of risks, fees, benefits, and restrictions of operating a franchise would be included in the
88. a) Disclosure statement
89. b) Franchise agreement
90. c) Franchise contract
91. d) Purchase agreement

Ans:  a       LO:  4       Page:  121          AACSB:  Analytic

88. Alicia is considering opening a popular pizza franchise. Before she makes her final decision, she contacts the company and obtains a document that outlines the risks, fees, benefits, and restrictions of owning the franchise.  This document is known as a
89. a) Financial statement
90. b) Contract
91. c) Franchise agreement
92. d) Disclosure statement

Ans:  d       LO:  4       Page:  121         AACSB:  Reflective Thinking

89. A disclosure statement should include a description of the lawsuits in which the franchisor and its officers, directors, and management personnel have been involved, also known as
90. a) Litigation
91. b) Justification
92. c) Intellectual property
93. d) Legal obligations

Ans:  a       LO:  4       Page:  122         AACSB:  Analytic

90. A complete statement of the basis for any earnings claims made to the franchisee is referred to as
91. a) Exclusive territory
92. b) Financial assistance
93. c) Earning capacity
94. d) Financial control

Ans:  c       LO:  4       Page:  123         AACSB:  Analytic

91. Whether a franchise is required to carry the full line of the franchisor’s products or whether additional product lines can be added would fall under the ________ section of the disclosure statement.
92. a) Purchase obligations
93. b) Product or service restrictions
94. c) Personal participation of franchisees
95. d) Exclusive territory

Ans:  b       LO:  4       Page:  123          AACSB:  Analytic

92. Franchisees have recently alleged that the franchisor has overlapped franchise areas. This is a breach of
93. a) Termination of the franchise agreement
94. b) Due diligence
95. c) The exclusive territory rights
96. d) Franchise fees

Ans:  c       LO:  4       Page:  123          AACSB:  Analytic

93. In the section of the disclosure statement titled “Information about franchisees,” the franchisor must provide the names and addresses of all franchisees located in which proximity to the prospective franchisee?
94. a) City
95. b) County
96. c) State
97. d) Region

Ans:  c       LO:  4       Page:  123          AACSB:  Analytic

94. The legal contract that binds both parties involved in the franchise is known as the
95. a) Franchise agreement
96. b) Disclosure statement
97. c) Contract
98. d) Business obligation

Ans:  a       LO:  4       Page:  124          AACSB:  Analytic

95. All but which of the following should be thoroughly understood before the franchise agreement is signed?
96. a) How the agreement can be terminated or renewed
97. b) What fees have to be paid
98. c) The rights to exclusive territory
99. d) All new products the franchisor will develop for the next year

Ans:  d       LO:  4       Page:  124          AACSB:  Analytic

96. Some franchise agreements specifically require the franchisee to have a percentage of the total franchise fee from which of the following?
97. a) A venture capitalist
98. b) A nonborrowed source
99. c) An accredited bank
100. d) The Small Business Administration (SBA)

Ans:  b       LO:  4       Page:  124          AACSB:  Analytic

97. The one-time payment made to become a franchisee is called a/an
98. a) Franchise agreement
99. b) Franchise fee
100. c) Royalty fee
101. d) Initial investment fee

Ans:  b       LO:  4       Page:  124          AACSB:  Analytic

98. The ongoing payments that franchisees pay to franchisors—which is usually a percentage of gross sales—is known as a/an
99. a) Franchise agreement
100. b) Franchise fee
101. c) Royalty fee
102. d) Initial investment fee

Ans:  c       LO:  4       Page:  124          AACSB:  Analytic

99. Royalty fees are calculated as a percentage of
100. a) Gross sales
101. b) Gross profit
102. c) Net profit
103. d) Pretax revenue

Ans:  a       LO:  4       Page:  124          AACSB:  Analytic

 

 

 

 

100. Before Walter can officially become a franchisee of an auto repair shop, he must first sign a document that defines the precise, detailed conditions of the legal relationship between the franchisee and the franchisor. This document is referred to as the
101. a) Forced contract
102. b) Franchise agreement
103. c) Disclosure statement
104. d) Due diligence statement

Ans:  b       LO:  4       Page:  124         AACSB:  Reflective Thinking

101. Before she could open her franchised hair salon, Lori knew she had to pay a one-time fee of $10,000 to the franchisor. This one-time fee is known as the
102. a) Franchise fee
103. b) Industry fee
104. c) Royalty fee
105. d) Due diligence fee

Ans:  a      LO:  4       Page:  124          AACSB:  Reflective Thinking

102. Most franchise contracts run
103. a) Indefinitely
104. b) From 1 to 5 years
105. c) From 15 to 20 years
106. d) From 5 to 15 years

Ans:  d       LO:  4       Page:  125        AACSB:  Analytic

103. Before signing a franchise agreement, a franchisee should make sure that the franchisor must show _____ _____ to terminate the contract
104. a) Real cause
105. b) Due diligence
106. c) Good cause
107. d) Cause clause

Ans:    c     LO:  4       Page:  125          AACSB:  Analytic

104. Which of the following sections in the franchise agreement contains information on rights of first refusal, advertising restrictions, and performance quotas?
105. a) Termination of the franchise agreement
106. b) Terms and renewal of the agreement
107. c) Exclusive territory
108. d) Franchise, advertising, and royalty fees

Ans:  c       LO:  4       Page:  125          AACSB:  Analytic

105. Overseas franchising has become a major activity for U.S. companies facing increased
106. a) Taxes
107. b) Domestic competition
108. c) Regulation
109. d) Domestic lawsuits

Ans:  b       LO:  5       Page:  126          AACSB:  Diversity

106. Because it is close in proximity and its markets are similar, ________ is an increasingly attractive market for U.S. franchises.
107. a) France
108. b) Canada
109. c) Cuba
110. d) Great Britain

Ans:  b       LO:  5       Page:  126        AACSB:  Diversity

 

 

107. In _________, federal law does not seek to regulate the relationship between franchisor and franchisee, but the franchisee must receive full information at least 10 days before execution of the franchise agreement.
108. a) Russia
109. b) China
110. c) Brazil
111. d) France

Ans:  c       LO:  5      Page:  127          AACSB:  Diversity

 

 

Scenario Questions

 

Use the following to answer questions 108-112:

 

Scenario 5-1. Connie is considering opening a small bakery called Connie’s Cookie Cupboard. She loves to bake cookies.  Family and friends have told her she should consider opening a small business using her baking skills. Connie has no business experience and no idea where to start in opening her own business. She also has very few funds available. One day she is glancing through the newspaper and notices an ad for a bakery franchise that would like to open an outlet in the local mall. This franchise provides everything from equipment to packaging to full business services. She decides to look into the opportunity further.

108. In Scenario 5-1 above, all but which of the following would be a major advantage for Connie in choosing to purchase a franchise as opposed to opening her own business?
109. a) Marketing expertise
110. b) Managerial assistance
111. c) Proven product
112. d) The cost of the franchise

Ans:  d       LO:  3       Page:   112         AACSB:  Reflective Thinking

109. In Scenario 5-1 above, which of the following would be the major disadvantage for Connie in purchasing a franchise?
110. a) Potential for business growth
111. b) Restrictions on her freedom and creativity
112. c) Marketing expertise
113. d) Quality control standards

Ans:  b       LO:  3       Page:  112          AACSB:  Reflective Thinking

110. In Scenario 5-1 above, which of the following types of franchises is the bakery franchise?
111. a) Product franchising
112. b) Business-format franchising
113. c) Service franchising
114. d) Joint venture

Ans:  b       LO:  2       Page:  111          AACSB:  Reflective Thinking

111. In Scenario 5-1 above, which of the following advantages from the franchisor would benefit Connie the most?
112. a) Quality product
113. b) Efficiency
114. c) Professional guidance
115. d) An opportunity to learn

Ans:  c       LO:  3       Page:  112          AACSB:  Reflective Thinking

112. In Scenario 5-1 above, all but which of the following would be disadvantages for Connie if she chose to use franchising?
113. a) Problems of termination or transfer
114. b) Poor performance of other franchises
115. c) The cost of the franchise
116. d) Marketing expertise

Ans:  d       LO:  3       Page:  112          AACSB:  Reflective Thinking

Use the following to answer questions 113-117:

 

Scenario 5-2. Connie is considering opening a small bakery called Connie’s Cookie Cupboard. She loves to bake cookies.  Family and friends have told her she should consider opening a small business using her baking skills. Connie has no business experience and no idea where to start in opening her own business. She also has very few funds available. One day she is glancing through the newspaper and notices an ad for a bakery franchise that would like to open an outlet in the local mall. This franchise provides everything from equipment to packaging to full business services.  She decides to look into the opportunity further.

Connie decides to pursue her franchise opportunity further. The bakery franchise looks promising. Since she has a limited amount of funds, no business experience, and no idea how to start a new business, she is seriously considering purchasing the bakery franchise located in the local mall. She obtains a copy of the document that will legally bind her.

113. Refer to Scenario 5-2. The document that she is carefully considering is the
114. a) Franchise legal contract
115. b) Franchise agreement
116. c) Business contract
117. d) Partnership agreement

Ans:  b       LO:  4       Page:  124          AACSB:  Reflective Thinking

114. In Scenario 5-2 above, as Connie is reading through the agreement, she sees that a percentage of her gross sales will be paid to the franchisor. These are called
115. a) Franchise fees
116. b) Royalty fees
117. c) Advertising fees
118. d) Operation fees

Ans:  b       LO:  4       Page:  124          AACSB:  Reflective Thinking

115. In Scenario 5-2 above, Connie is concerned that the bakery franchise not open other outlets within 10 miles of the mall. She is concerned about
116. a) Termination of the franchise agreement
117. b) Exclusive territory
118. c) Terms and renewal of the agreement
119. d) Mutual territory

Ans:  b       LO:  4       Page:  125          AACSB:  Reflective Thinking

116. In Scenario 5-2 above, after reading through the agreement, everything seems clear to Connie. Is there anyone else she should have read the agreement?
117. a) Her friends at work
118. b) Her CPA and lawyer
119. c) Her friends and a lawyer
120. d) Her friends and her CPA

Ans:  b       LO:  4       Page:  126          AACSB:  Reflective Thinking

117. In Scenario 5-2 above, the FTC requires all franchisors to provide which of the following for potential franchise owners?
118. a) Statements of information
119. b) Income statements
120. c) Disclosure statements
121. d) Franchise statements

Ans:  c       LO:  4       Page:  121          AACSB:  Reflective Thinking

 

 

 

 

Short-Answer Questions

118. Describe the two types of franchising systems, explain how they differ, and give an example of each.

Ans:  Product franchising allows franchisee to buy products or use the trade name.      • Connects a single supplier with many dealers throughout a specific geographic region.      •  An example would be Ford dealerships       • Business format is a turnkey approach      •  Franchisors sell the products as well as the entire way of doing business, including operation procedures, marketing packages, buildings and equipment, and full business services.      • An example would be Holiday Inn       LO:  2       Page:  110-111 AACSB:  Analytic

119. List and describe three major advantages of franchising for the franchisee.

Ans:  Product readiness      • Efficiency       • Marketing expertise       • Potential for business growth       Professional guidance      • Recognized standards       • Opportunity to learn       LO:  3       Page:  112-113 AACSB:  Analytic

120. List and describe three major disadvantages to the franchisee when considering franchising.

Ans:  Cost of the franchise      • Restrictions on freedom or creativity      • Risk of fraud or misunderstanding      •  Problems of termination or transfer       • Poor performance of other franchises       LO:  3       Page:  113-114       AACSB:  Analytic

121. After finding a franchise that a small business owner would consider purchasing, discuss three questions that should be asked.

Ans:  Did the lawyer approve the contract?      • Is everything legal in the state, county, and city?     • Is exclusive territory included?     •  Is the franchise involved with any other franchise companies handling similar merchandise or services?      • How can the franchise be terminated?     • If the franchise is sold, will goodwill be compensated?       LO:  4       Page:  120           AACSB:  Analytic

122. Explain why overseas franchising has become a major activity for U.S. companies.

Ans:  Saturated domestic markets      • Less crowded foreign markets       • Underserved foreign markets       LO:  5       Page:  126 AACSB:  Diversity

123. List at least three questions that individuals should ask themselves to determine whether franchising is the appropriate route to small business ownership.

Ans:  How much equity capital will you need to purchase the franchise and operate it until your income equals your expenses?   • Are you prepared to give up some independence of action to secure the advantages offered by the franchise?                     • Do you really believe you have the innate ability, training, and experience to work smoothly and profitably with the franchisor, employees, and customers?         • Are you ready to make a long-term commitment to working with this franchisor?

LO:  4       Page:  117              AACSB:  Analytic

124. When considering a franchise, list at least three questions that should be considered to analyze the market in which the franchise will be operating.

Ans:  Does the product or service have a market in your territory at the prices that you will have to charge? • Will the population in your proposed territory increase, remain static, or decrease over the next five years?    • Will the product or services you are considering be in greater demand, in about the same demand, or in less demand five years from now? • What competition already exists in your territory for the product or service you contemplate selling? LO:  4       Page:  121            AACSB:  Analytic