Small Business Management An Entrepreneur's Guidebook Mary Jane Byrd 8e - Test Bank

Small Business Management An Entrepreneur's Guidebook Mary Jane Byrd 8e - Test Bank   Instant Download - Complete Test Bank With Answers     Sample Questions Are Posted Below   Chapter 05 Create, Buy, or Franchise a Small Business   Multiple Choice Questions 1. _____ is the process of finding a small—but profitable—demand for something …

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Small Business Management An Entrepreneur’s Guidebook Mary Jane Byrd 8e – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Chapter 05

Create, Buy, or Franchise a Small Business

 

Multiple Choice Questions

1. _____ is the process of finding a small—but profitable—demand for something and producing a custom-made product for that market.

A. Lead marketing

 

B. Challenge marketing

 

C. Content marketing

 

D. Niche marketing

 

2. John wants to start his own business. After doing some research, he has decided to specialize in cleaning kitchens since most homemakers are not satisfied with the quality of the service offered by the residential cleaning companies. This process of finding a small—but profitable—demand for something and producing a custom-made product or service is known as _____.

A. out-of-home advertising

 

B. niche marketing

 

C. sales promotion

 

D. visual merchandising

 

3. Which of the following refers to a group of retired—but active—managers from all walks of life who help people develop their business ideas?

A. Service Corps of Retired Executives

 

B. Federal Small Business Administration

 

C. State Economic Development Agency

 

D. Small Business Development Center

 

4. The website of the Federal Small Business Administration has a self-help program called the _____, which helps prospective entrepreneurs focus on some of the factors they need to consider before starting their own business.

A. Market Research Questionnaire

 

B. Directory of Entrepreneurship

 

C. Small Business Startup Kit

 

D. Test Marketing Tool

 

5. Which of the following is a good source of information through which prospective business owners get help and advice?

A. Business Committee for the Arts

 

B. State Economic Development Agencies

 

C. Federal Trade Commission

 

D. Business Council for International Understanding

 

6. _____ are private associations of local (or regional) business and professional people who are familiar with an area’s needs.

A. Offices of International Trade

 

B. Chambers of commerce

 

C. Directory of Trade Associations in the United States

 

D. State Economic Development Agencies

 

7. _____ is the system of gathering, recording, classifying, analyzing, and interpreting data related to merchandising of goods and services.

A. Market research

 

B. Operational research

 

C. Drip marketing

 

D. Global marketing

 

8. Prospective entrepreneurs can access data from _____ to obtain information on subjects such as population, business, and housing.

A. MIT Enterprise Forum

 

B. International Franchise Association

 

C. Census Bureau

 

D. Federal Trade Commission

 

9. Which of the following statements is true of market research in the context of small businesses?

A. Formal research programs are a valuable but an expensive way to obtain guidance.

 

B. The district offices of the U.S. Department of Education have good libraries that can be helpful to small businesses.

 

C. The Business Committee for the Arts has publications on organizing small businesses.

 

D. Market research consists of granting a franchisee the right to sell a product.

 

10. While working in a fast food outlet, Harold observed that most of the customers were working in offices in the neighborhood. Sensing a profitable opportunity, he decided to open a catering business. He offered to deliver lunch directly to the offices so that the businesspeople would not have to interrupt their meetings to go out for lunch. In the context of the above scenario, which of the following was the reason for Harold to start his own business?

A. To obtain fresh inventory

 

B. To take advantage of the latest technology to fill a void

 

C. To select a competitive environment

 

D. To have a free hand in selecting personnel

 

11. Which of the following is a reason for starting a new business?

A. The owner has the freedom to select his or her own competitive environment.

 

B. It is easy to find the right business.

 

C. The chances of succeeding is not as high in a franchise as in a small business start-up.

 

D. The owner does not have to experience problems in establishing basic management systems and controls when starting his or her own business.

 

12. Catherine, who loves dogs, wants to offer dog-walking services in her neighborhood. Her research leads her to a small professional pet care store operating in the area, which she decides to buy. Which of the following is a good reason for Catherine to buy the pet care store?

A. The latest technology can be used to fill a service gap.

 

B. A fresh inventory can be obtained.

 

C. A competitive environment may be selected.

 

D. The facilities are already available.

 

13. Jane, who wants to start her own business, considers buying an Internet café which is up for sale in her neighborhood. However, Jane discovers that Internet connectivity tends to be erratic in the store since she lives in a remote town and decides against it. Which of the following is most likely the reason for Jane’s refusal to buy the business?

A. Lack of an established product line

 

B. Lack of an established channel of distribution

 

C. Problems due to old and obsolete facilities

 

D. Problems associated with workforce availability

 

14. Which of the following is a benefit of buying a franchise?

A. The franchisee can identify his or her market niche.

 

B. The franchisee can select his or her own sales activities.

 

C. The franchiser brings proven methods of operation to aid the franchisee.

 

D. The franchiser gives complete independence to run the franchise.

 

15. Which of the following is a drawback of buying a franchise?

A. Franchisers do not provide any guidance to the franchisee.

 

B. Franchises are not available in a wide range of endeavors.

 

C. Franchisers have to identify their market niche and conduct their own sales activities.

 

D. Franchisees face issues in understanding their role in the responsibilities of operating the franchise.

 

16. In franchising, which of the following is a benefit to the franchisee?

A. Share in local or national promotion

 

B. Low operating costs

 

C. Fast expansion and penetration of business

 

D. Increase in royalty fees

 

17. In a franchise, which of the following is an advantage for a franchiser?

A. Brand recognition

 

B. Low operating costs

 

C. Financial assistance

 

D. Share in national promotion

 

18. _____ is a marketing system based on a legal arrangement that permits one party to conduct business as an individual owner while abiding by the terms and conditions set by the second party.

A. Joint venture

 

B. Wholesaling

 

C. Wholly owned subsidiary

 

D. Franchising

 

19. Which of the following statements is true of franchising?

A. The parties in a franchising arrangement usually compete with each other for success.

 

B. The franchisee is the company that owns the franchise’s name and distinctive elements and grants others the right to sell its product.

 

C. A franchise is an agreement whereby an independent businessperson is given exclusive rights to sell a specified good or service.

 

D. A franchiser is usually an independent local businessperson who agrees with the franchise owner to operate the business on a local or regional basis.

 

20. What does a franchiser do?

A. Owns the company’s name and licenses others to sell its products

 

B. Provides a licensing fee to the owner of the business

 

C. Runs the day-to-day operations of the local business

 

D. Agrees to sell the product according to the franchisee’s requirements

 

21. Burger’s Inc. owns a number of fast food stores across the country. Ryan, who wants to start his own business, decides to open a store under the Burger’s Inc. trademark. He has to sell and market the fast food products according to the terms of the licensing agreement. In this scenario, Ryan is a:

A. venture capitalist.

 

B. franchiser.

 

C. franchisee.

 

D. manufacturing agent.

 

22. Product and trademark franchising:

A. grants the franchisee the right to sell a widely recognized brand.

 

B. is the systematic gathering, recording, and analyzing of data related to the marketing of goods and services.

 

C. is a partnership in which each partner actively participates as an equal in managing the business.

 

D. grants a franchisee the right to market the brand and trademark and to use a complete operating system.

 

23. Which type of franchising system grants the franchisee the right to market the product and trademark and use a complete operating system?

A. Product format franchising

 

B. Business format franchising

 

C. Trademark franchising

 

D. International franchising

 

24. Which of the following is true of business format franchising?

A. The franchiser exercises very little control over the franchisee’s business operations.

 

B. Gasoline service stations and truck dealerships use this form of franchising.

 

C. The franchiser provides assistance to the franchisee to train franchise personnel.

 

D. Franchisees concentrate on handling the franchiser’s product line and identify their business with that firm.

 

25. What is due diligence?

A. The research and analysis of the company that is done before a business transaction

 

B. The efforts of managers from all walks of life to help people develop their business ideas

 

C. The process of producing a custom-made product for that market

 

D. The arrangement under which employees may schedule their own hours around a core time

 

26. Which of the following is true of a franchise fee?

A. It is a fee paid to the franchiser at regular intervals of time.

 

B. It is a fee based on the percentage of a franchisee’s gross revenue.

 

C. It is a one-time fee paid to the franchiser.

 

D. It is a continuous fee paid by the franchiser to the franchisee.

 

27. The continuous fee paid by the franchisee to the franchiser based on a percentage of the franchisee’s gross revenue is termed:

A. royalty fee.

 

B. start-up fee.

 

C. licensing fee.

 

D. franchise fee.

 

28. Which document provides information to possible new franchisees on 20 items required by the Federal Trade Commission?

A. Business plan agreement

 

B. Disclosure statement

 

C. Marketing statement

 

D. Buy-sell agreement

 

29. _____ is the concept that two or more people, working together in a coordinated way, can accomplish more than the sum of their independent efforts.

A. Duality

 

B. Due diligence

 

C. Equity investment

 

D. Synergy

 

30. Which of the following is true of combination franchising?

A. It is opposed to the concept of synergy.

 

B. Cultural clashes can lead to the breakup of this arrangement.

 

C. Firms involved in this arrangement should be competing against each other.

 

D. This type of merger weakens the participating firms.

 

31. _____ is the most important professional assistance one needs before investing in a franchise.

A. Technological advice

 

B. Legal advice

 

C. Medical advice

 

D. Communication advice

 

32. The _____ in the United States has a code of ethics that covers a franchiser’s obligations to its franchisees.

A. International Franchise Association

 

B. Franchising Code of Conduct

 

C. Business Format Franchising

 

D. Product and Trademark Franchising

 

 

True / False Questions

33. When a person wants to start a new business, the first step is to decide whether to start a new business, buy an existing one, or buy a franchise.

True    False

 

34. Planning to start one’s own business begins with searching for or identifying a good or service to sell.

True    False

 

35. Niche marketing is the systematic gathering, recording, and analyzing of data related to the marketing of goods and services.

True    False

 

36. Reintroducing an old product is a good business idea since customer tastes run in cycles.

True    False

 

37. The Small Business Administration is a group of retired managers who help people develop their business ideas.

True    False

 

38. The Small Business Administration in the United States is a particularly effective source of local information for prospective business owners because it is familiar with an area’s needs.

True    False

 

39. Small businesses never select one product niche because they usually have sufficient resources to cover the whole market.

True    False

 

40. The Service Corps of Retired Executives publishes many useful books on planning and organizing small businesses.

True    False

 

41. In a given market area, the fact that a high number of similar firms have gone out of business usually signals market weakness.

True    False

 

42. Small businesses must strive for low overhead, use no-frills assets, and look for better real estate deals.

True    False

 

43. Lack of an established product line does not typically stop a person from starting a new business.

True    False

 

44. One should buy an existing business even if the physical facilities of the firm are old or obsolete.

True    False

 

45. Even if an established or an existing business is in a desirable location, it is not a good idea to buy it.

True    False

 

46. An advantage of buying a franchise is that it already has many of the requirements for success.

True    False

 

47. In the context of small businesses, franchises tend to fail because they lack sufficient funds to cover all needs.

True    False

 

48. In the context of small businesses, franchises tend to fail because of unsuccessful marketing.

True    False

 

49. One way to help avoid franchise scams is to carefully review the franchiser’s disclosure document.

True    False

 

50. A franchisee owns a franchise’s name and distinctive elements and licenses others to sell its products.

True    False

 

51. Product and trademark franchising is usually observed in the restaurant industry.

True    False

 

52. A franchiser exercises complete control over a franchisee’s business operations.

True    False

 

53. The industry group with the largest volume of sales in a business format franchising is automobile and truck dealerships.

True    False

 

54. A disadvantage of franchising is the voluminous paperwork needed to provide disclosure documents to potential franchisees.

True    False

 

55. Due diligence is the concept that two or more people, working together in a coordinated way, can accomplish more than the sum of their independent efforts.

True    False

 

56. The disclosure agreement is a document that provides information on 20 items required by the Federal Trade Commission.

True    False

 

57. In the context of franchising, a disclosure statement provides demographic information to the Federal Trade Commission.

True    False

 

58. A problem area faced by franchisees is the high price of supplies that must be bought from the franchiser.

True    False

 

59. In the context of franchising, the success of fast food restaurants is related to the increasing number of women working outside the home.

True    False

 

60. Combination franchising is the ideal arrangement for big-name franchise operations to avoid cultural clashes.

True    False

 

61. Some franchisers prefer franchisees who own a large number of franchise outlets because it speeds their growth.

True    False

 

62. Small businesses in the United States are moving away from synergy as they are trying to reengineer themselves.

True    False

 

 

Essay Questions

63. How would a potential entrepreneur use market research to obtain information about the market?

 

 

 

 

64. What are the three things that a potential entrepreneur should follow when estimating sales and market share?

 

 

 

 

65. What are the reasons for starting a new business and for not starting a new business?

 

 

 

 

66. What are the advantages and disadvantages of purchasing an existing small business?

 

 

 

 

67. What are the benefits and drawbacks of buying a franchise?

 

 

 

 

68. What is franchising?

 

 

 

 

69. Describe the two types of franchising systems.

 

 

 

 

70. Define the terms franchisee fees and royalty fees.

 

 

 

 

71. What is a disclosure statement?

 

 

 

 

72. Describe some industries in the United States where franchising is expected to grow.

 

 

 

 

Chapter 05 Create, Buy, or Franchise a Small Business Answer Key

Multiple Choice Questions

1. _____ is the process of finding a small—but profitable—demand for something and producing a custom-made product for that market.

A. Lead marketing

 

B. Challenge marketing

 

C. Content marketing

 

D. Niche marketing

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how to find your niche.
 

 

2. John wants to start his own business. After doing some research, he has decided to specialize in cleaning kitchens since most homemakers are not satisfied with the quality of the service offered by the residential cleaning companies. This process of finding a small—but profitable—demand for something and producing a custom-made product or service is known as _____.

A. out-of-home advertising

 

B. niche marketing

 

C. sales promotion

 

D. visual merchandising

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how to find your niche.
 

 

3. Which of the following refers to a group of retired—but active—managers from all walks of life who help people develop their business ideas?

A. Service Corps of Retired Executives

 

B. Federal Small Business Administration

 

C. State Economic Development Agency

 

D. Small Business Development Center

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how to find your niche.
 

 

4. The website of the Federal Small Business Administration has a self-help program called the _____, which helps prospective entrepreneurs focus on some of the factors they need to consider before starting their own business.

A. Market Research Questionnaire

 

B. Directory of Entrepreneurship

 

C. Small Business Startup Kit

 

D. Test Marketing Tool

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how to find your niche.
 

 

5. Which of the following is a good source of information through which prospective business owners get help and advice?

A. Business Committee for the Arts

 

B. State Economic Development Agencies

 

C. Federal Trade Commission

 

D. Business Council for International Understanding

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how to find your niche.
 

 

6. _____ are private associations of local (or regional) business and professional people who are familiar with an area’s needs.

A. Offices of International Trade

 

B. Chambers of commerce

 

C. Directory of Trade Associations in the United States

 

D. State Economic Development Agencies

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how to find your niche.
 

 

7. _____ is the system of gathering, recording, classifying, analyzing, and interpreting data related to merchandising of goods and services.

A. Market research

 

B. Operational research

 

C. Drip marketing

 

D. Global marketing

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how to find your niche.
 

 

8. Prospective entrepreneurs can access data from _____ to obtain information on subjects such as population, business, and housing.

A. MIT Enterprise Forum

 

B. International Franchise Association

 

C. Census Bureau

 

D. Federal Trade Commission

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how to find your niche.
 

 

9. Which of the following statements is true of market research in the context of small businesses?

A. Formal research programs are a valuable but an expensive way to obtain guidance.

 

B. The district offices of the U.S. Department of Education have good libraries that can be helpful to small businesses.

 

C. The Business Committee for the Arts has publications on organizing small businesses.

 

D. Market research consists of granting a franchisee the right to sell a product.

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how to find your niche.
 

 

10. While working in a fast food outlet, Harold observed that most of the customers were working in offices in the neighborhood. Sensing a profitable opportunity, he decided to open a catering business. He offered to deliver lunch directly to the offices so that the businesspeople would not have to interrupt their meetings to go out for lunch. In the context of the above scenario, which of the following was the reason for Harold to start his own business?

A. To obtain fresh inventory

 

B. To take advantage of the latest technology to fill a void

 

C. To select a competitive environment

 

D. To have a free hand in selecting personnel

 

Accessibility: Keyboard Navigation
Difficulty: 3 Hard
Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.
 

 

11. Which of the following is a reason for starting a new business?

A. The owner has the freedom to select his or her own competitive environment.

 

B. It is easy to find the right business.

 

C. The chances of succeeding is not as high in a franchise as in a small business start-up.

 

D. The owner does not have to experience problems in establishing basic management systems and controls when starting his or her own business.

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.
 

 

12. Catherine, who loves dogs, wants to offer dog-walking services in her neighborhood. Her research leads her to a small professional pet care store operating in the area, which she decides to buy. Which of the following is a good reason for Catherine to buy the pet care store?

A. The latest technology can be used to fill a service gap.

 

B. A fresh inventory can be obtained.

 

C. A competitive environment may be selected.

 

D. The facilities are already available.

 

Accessibility: Keyboard Navigation
Difficulty: 3 Hard
Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.
 

 

13. Jane, who wants to start her own business, considers buying an Internet café which is up for sale in her neighborhood. However, Jane discovers that Internet connectivity tends to be erratic in the store since she lives in a remote town and decides against it. Which of the following is most likely the reason for Jane’s refusal to buy the business?

A. Lack of an established product line

 

B. Lack of an established channel of distribution

 

C. Problems due to old and obsolete facilities

 

D. Problems associated with workforce availability

 

Accessibility: Keyboard Navigation
Difficulty: 3 Hard
Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.
 

 

14. Which of the following is a benefit of buying a franchise?

A. The franchisee can identify his or her market niche.

 

B. The franchisee can select his or her own sales activities.

 

C. The franchiser brings proven methods of operation to aid the franchisee.

 

D. The franchiser gives complete independence to run the franchise.

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.
 

 

15. Which of the following is a drawback of buying a franchise?

A. Franchisers do not provide any guidance to the franchisee.

 

B. Franchises are not available in a wide range of endeavors.

 

C. Franchisers have to identify their market niche and conduct their own sales activities.

 

D. Franchisees face issues in understanding their role in the responsibilities of operating the franchise.

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.
 

 

16. In franchising, which of the following is a benefit to the franchisee?

A. Share in local or national promotion

 

B. Low operating costs

 

C. Fast expansion and penetration of business

 

D. Increase in royalty fees

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-05 Describe the growing opportunities in franchising.
 

 

17. In a franchise, which of the following is an advantage for a franchiser?

A. Brand recognition

 

B. Low operating costs

 

C. Financial assistance

 

D. Share in national promotion

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-05 Describe the growing opportunities in franchising.
 

 

18. _____ is a marketing system based on a legal arrangement that permits one party to conduct business as an individual owner while abiding by the terms and conditions set by the second party.

A. Joint venture

 

B. Wholesaling

 

C. Wholly owned subsidiary

 

D. Franchising

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-05 Describe the growing opportunities in franchising.
 

 

19. Which of the following statements is true of franchising?

A. The parties in a franchising arrangement usually compete with each other for success.

 

B. The franchisee is the company that owns the franchise’s name and distinctive elements and grants others the right to sell its product.

 

C. A franchise is an agreement whereby an independent businessperson is given exclusive rights to sell a specified good or service.

 

D. A franchiser is usually an independent local businessperson who agrees with the franchise owner to operate the business on a local or regional basis.

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-05 Describe the growing opportunities in franchising.
 

 

20. What does a franchiser do?

A. Owns the company’s name and licenses others to sell its products

 

B. Provides a licensing fee to the owner of the business

 

C. Runs the day-to-day operations of the local business

 

D. Agrees to sell the product according to the franchisee’s requirements

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-05 Describe the growing opportunities in franchising.
 

 

21. Burger’s Inc. owns a number of fast food stores across the country. Ryan, who wants to start his own business, decides to open a store under the Burger’s Inc. trademark. He has to sell and market the fast food products according to the terms of the licensing agreement. In this scenario, Ryan is a:

A. venture capitalist.

 

B. franchiser.

 

C. franchisee.

 

D. manufacturing agent.

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-05 Describe the growing opportunities in franchising.
 

 

22. Product and trademark franchising:

A. grants the franchisee the right to sell a widely recognized brand.

 

B. is the systematic gathering, recording, and analyzing of data related to the marketing of goods and services.

 

C. is a partnership in which each partner actively participates as an equal in managing the business.

 

D. grants a franchisee the right to market the brand and trademark and to use a complete operating system.

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-05 Describe the growing opportunities in franchising.
 

 

23. Which type of franchising system grants the franchisee the right to market the product and trademark and use a complete operating system?

A. Product format franchising

 

B. Business format franchising

 

C. Trademark franchising

 

D. International franchising

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-05 Describe the growing opportunities in franchising.
 

 

24. Which of the following is true of business format franchising?

A. The franchiser exercises very little control over the franchisee’s business operations.

 

B. Gasoline service stations and truck dealerships use this form of franchising.

 

C. The franchiser provides assistance to the franchisee to train franchise personnel.

 

D. Franchisees concentrate on handling the franchiser’s product line and identify their business with that firm.

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-05 Describe the growing opportunities in franchising.
 

 

25. What is due diligence?

A. The research and analysis of the company that is done before a business transaction

 

B. The efforts of managers from all walks of life to help people develop their business ideas

 

C. The process of producing a custom-made product for that market

 

D. The arrangement under which employees may schedule their own hours around a core time

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-06 Explain how to tell if a franchise is right for you.
 

 

26. Which of the following is true of a franchise fee?

A. It is a fee paid to the franchiser at regular intervals of time.

 

B. It is a fee based on the percentage of a franchisee’s gross revenue.

 

C. It is a one-time fee paid to the franchiser.

 

D. It is a continuous fee paid by the franchiser to the franchisee.

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-06 Explain how to tell if a franchise is right for you.
 

 

27. The continuous fee paid by the franchisee to the franchiser based on a percentage of the franchisee’s gross revenue is termed:

A. royalty fee.

 

B. start-up fee.

 

C. licensing fee.

 

D. franchise fee.

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-06 Explain how to tell if a franchise is right for you.
 

 

28. Which document provides information to possible new franchisees on 20 items required by the Federal Trade Commission?

A. Business plan agreement

 

B. Disclosure statement

 

C. Marketing statement

 

D. Buy-sell agreement

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-06 Explain how to tell if a franchise is right for you.
 

 

29. _____ is the concept that two or more people, working together in a coordinated way, can accomplish more than the sum of their independent efforts.

A. Duality

 

B. Due diligence

 

C. Equity investment

 

D. Synergy

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-07 Explain the future of franchising.
 

 

30. Which of the following is true of combination franchising?

A. It is opposed to the concept of synergy.

 

B. Cultural clashes can lead to the breakup of this arrangement.

 

C. Firms involved in this arrangement should be competing against each other.

 

D. This type of merger weakens the participating firms.

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-07 Explain the future of franchising.
 

 

31. _____ is the most important professional assistance one needs before investing in a franchise.

A. Technological advice

 

B. Legal advice

 

C. Medical advice

 

D. Communication advice

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-06 Explain how to tell if a franchise is right for you.
 

 

32. The _____ in the United States has a code of ethics that covers a franchiser’s obligations to its franchisees.

A. International Franchise Association

 

B. Franchising Code of Conduct

 

C. Business Format Franchising

 

D. Product and Trademark Franchising

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-06 Explain how to tell if a franchise is right for you.
 

 

True / False Questions

33. When a person wants to start a new business, the first step is to decide whether to start a new business, buy an existing one, or buy a franchise.

FALSE

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-02 Describe the steps involved in the procedure recommended for going into business.
 

 

34. Planning to start one’s own business begins with searching for or identifying a good or service to sell.

TRUE

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-02 Describe the steps involved in the procedure recommended for going into business.
 

 

35. Niche marketing is the systematic gathering, recording, and analyzing of data related to the marketing of goods and services.

FALSE

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how to find your niche.
 

 

36. Reintroducing an old product is a good business idea since customer tastes run in cycles.

TRUE

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how to find your niche.
 

 

37. The Small Business Administration is a group of retired managers who help people develop their business ideas.

FALSE

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how to find your niche.
 

 

38. The Small Business Administration in the United States is a particularly effective source of local information for prospective business owners because it is familiar with an area’s needs.

FALSE

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how to find your niche.
 

 

39. Small businesses never select one product niche because they usually have sufficient resources to cover the whole market.

FALSE

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how to find your niche.
 

 

40. The Service Corps of Retired Executives publishes many useful books on planning and organizing small businesses.

FALSE

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how to find your niche.
 

 

41. In a given market area, the fact that a high number of similar firms have gone out of business usually signals market weakness.

TRUE

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how to find your niche.
 

 

42. Small businesses must strive for low overhead, use no-frills assets, and look for better real estate deals.

TRUE

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how to find your niche.
 

 

43. Lack of an established product line does not typically stop a person from starting a new business.

FALSE

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.
 

 

44. One should buy an existing business even if the physical facilities of the firm are old or obsolete.

FALSE

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.
 

 

45. Even if an established or an existing business is in a desirable location, it is not a good idea to buy it.

FALSE

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.
 

 

46. An advantage of buying a franchise is that it already has many of the requirements for success.

TRUE

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.
 

 

47. In the context of small businesses, franchises tend to fail because they lack sufficient funds to cover all needs.

TRUE

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.
 

 

48. In the context of small businesses, franchises tend to fail because of unsuccessful marketing.

TRUE

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.
 

 

49. One way to help avoid franchise scams is to carefully review the franchiser’s disclosure document.

TRUE

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.
 

 

50. A franchisee owns a franchise’s name and distinctive elements and licenses others to sell its products.

FALSE

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-05 Describe the growing opportunities in franchising.
 

 

51. Product and trademark franchising is usually observed in the restaurant industry.

FALSE

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-05 Describe the growing opportunities in franchising.
 

 

52. A franchiser exercises complete control over a franchisee’s business operations.

FALSE

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-05 Describe the growing opportunities in franchising.
 

 

53. The industry group with the largest volume of sales in a business format franchising is automobile and truck dealerships.

FALSE

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-05 Describe the growing opportunities in franchising.
 

 

54. A disadvantage of franchising is the voluminous paperwork needed to provide disclosure documents to potential franchisees.

TRUE

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-05 Describe the growing opportunities in franchising.
 

 

55. Due diligence is the concept that two or more people, working together in a coordinated way, can accomplish more than the sum of their independent efforts.

FALSE

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-06 Explain how to tell if a franchise is right for you.
 

 

56. The disclosure agreement is a document that provides information on 20 items required by the Federal Trade Commission.

TRUE

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-06 Explain how to tell if a franchise is right for you.
 

 

57. In the context of franchising, a disclosure statement provides demographic information to the Federal Trade Commission.

FALSE

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-06 Explain how to tell if a franchise is right for you.
 

 

58. A problem area faced by franchisees is the high price of supplies that must be bought from the franchiser.

TRUE

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-06 Explain how to tell if a franchise is right for you.
 

 

59. In the context of franchising, the success of fast food restaurants is related to the increasing number of women working outside the home.

TRUE

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-07 Explain the future of franchising.
 

 

60. Combination franchising is the ideal arrangement for big-name franchise operations to avoid cultural clashes.

FALSE

 

Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Learning Objective: 05-07 Explain the future of franchising.
 

 

61. Some franchisers prefer franchisees who own a large number of franchise outlets because it speeds their growth.

TRUE

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-07 Explain the future of franchising.
 

 

62. Small businesses in the United States are moving away from synergy as they are trying to reengineer themselves.

FALSE

 

Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Learning Objective: 05-07 Explain the future of franchising.
 

 

Essay Questions

63. How would a potential entrepreneur use market research to obtain information about the market?

There are many ways to identify a market, and all can be generally classified as marketing research. Market research is the systematic gathering, recording, and analyzing of data related to the marketing of goods and services. Formal research programs can be very valuable in giving direction, but they can also be expensive. Computers are helping to increase the amount of information gathered while reducing the cost.
Another means of collecting data is a search of existing literature. The first places to look in a library are the “technical section” and the “government documents section.” One should examine Census Bureau data on subjects such as population, business, and housing.
The U.S. Department of Commerce is another good source of information, as its district offices have well-stocked libraries of census data. The department publishes many useful books on planning and organizing small businesses.

 

Difficulty: 2 Medium
Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how to find your niche.
 

 

64. What are the three things that a potential entrepreneur should follow when estimating sales and market share?

There are three things that a potential entrepreneur needs to do when estimating his or her sales and market share. First, one must determine the size of the industry and market segment one wants to enter. Second, one must estimate the competition and determining how to stack up against it. Finally, estimate one’s own share of the market.
In studying the market area, the number of similar businesses that have gone out of business or merged with a competitor should be determined. A high number of these activities usually signals market weakness. Analysis of competitors’ activities may also indicate how effectively a new company can compete.
While the biggest worry for small businesses is their large national or global competitors, the natural advantage goes to the “excellent” companies—large or small—that strive for low overhead, use no-frills assets, and look for a better real estate deal. Small, growing companies should stay out of the path of focused market leaders and deliver unprecedented value to the chosen customers in their market niche.
In order to estimate one’s share of the market, one must determine the geographic boundaries of the market area and estimate how much of one’s product might be purchased. Finally, one must make an educated guess as to what part of this market one might attract as one’s share.

 

Difficulty: 3 Hard
Learning Objective: 05-03 Describe how to search for and identify a product needed by the public—that is, how to find your niche.
 

 

65. What are the reasons for starting a new business and for not starting a new business?

Some reasons for starting a new business lie in the owner’s freedom to define the nature of the business; create the preferred type of physical facilities; obtain fresh inventory; have a free hand in selecting and developing personnel; take advantage of the latest technology, equipment, materials, and tools to cover a void in acceptable products available; and select a competitive environment.
Some reasons for not starting a new business are problems in finding the right business; problems associated with assembling the resources, including the location, building, equipment, materials, and workforce; lack of an established product line; production problems associated with starting a new business; lack of an established market and channels of distribution; and problems in establishing basic management systems and controls. Also, the risk of failure is higher in small business start-ups than in acquiring a franchise or even buying an existing business.

 

Difficulty: 1 Easy
Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.
 

 

66. What are the advantages and disadvantages of purchasing an existing small business?

There are reasons to buy an existing business which include factors like the personnel of the existing business are already working; the facilities are already available; the product is already being produced for an existing market; the location may be desirable; relationships may have been established with banks and trade creditors; and revenues and profits are being generated, and goodwill exists.
There are reasons to not buy an existing business which include factors like the physical facilities may be old and obsolete; the employees may have a poor production record or attitude; the accounts receivable may be past due or uncollectible; the location may be bad; the financial condition and relations with financial institutions may be poor; and the inventory may be obsolete or of poor quality.

 

Difficulty: 2 Medium
Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.
 

 

67. What are the benefits and drawbacks of buying a franchise?

Franchise agreements normally spell out what both the franchiser and franchisee are responsible for and must do. Each party usually desires the success of the other. The franchiser brings proven and successful methods of operation and business images to aid the franchisee.
Another reason for buying a franchise is that it probably has many of the requirements for success. The market niche has been identified, and sales activities are in place. Also, the business may already be located, managed, and running. Most potential small business owners do not have the competencies or resources to get started successfully. But the franchiser can provide supplemental help through its experience and concentrated study of the field. These talents come from both successes and failures in the past.
However, buying a successful franchise is probably beyond the means of the ordinary entrepreneur, as the best ones are quite costly. Expenses include initial investments and fees, as well as royalty payments. The costs may outweigh the benefits from its purchase. It may not fit the owner’s desires or direction, or it may not give the franchisee enough independence. Finally, overpriced, poorly run, uninteresting, and “white elephant” franchises are potentially disastrous.

 

Difficulty: 2 Medium
Learning Objective: 05-04 Decide whether to start a new business, buy an existing one, or buy a franchise.
 

 

68. What is franchising?

Franchising is a marketing system whereby an individual owner conducts business according to the terms and conditions set by the franchiser. The franchise is the agreement granting the right to do business and specifying the terms and conditions under which the business will be conducted. The franchiser is the company that owns the franchise’s name and distinctive elements (such as signs, symbols, and patents) and that grants others the right to sell its product. The franchisee is usually an independent local businessperson who agrees with the franchise owner to operate the business on a local or regional basis. While the franchisee is given the right to market the franchiser’s designated goods or services, that marketing must be done according to the terms of the licensing agreement. The contract specifies what the franchisee can and cannot do and prescribes certain penalties for noncompliance.

 

Difficulty: 1 Easy
Learning Objective: 05-05 Describe the growing opportunities in franchising.
 

 

69. Describe the two types of franchising systems.

There are two types of franchising systems: product and trademark franchising; and business format franchising.
Product and trademark franchising is an arrangement under which the franchisee is granted the right to sell a widely recognized product or brand. Most such franchisees concentrate on handling one franchiser’s product line and identify their business with that firm. Familiar examples include automobile and truck dealerships, gasoline service stations, and soft-drink bottlers. The franchiser exercises very little control over the franchisee’s operations; what control there is has to do with maintaining the integrity of the product, not with the franchisee’s business operations.
Business format franchising is a relationship in which the franchisee is granted the right to use an entire marketing system, along with ongoing assistance and guidance from the franchiser. The industry groups with the largest volume of sales in this type of franchising are restaurants, retailing (nonfood), hotels and motels, business aids and services, automotive products and services, and convenience stores.

 

Difficulty: 1 Easy
Learning Objective: 05-05 Describe the growing opportunities in franchising.
 

 

70. Define the terms franchisee fees and royalty fees.

A franchise fee is one-time fee paid by the franchisee to the franchiser for the business concept, rights to use of trademarks, management assistance, and other related services from the franchiser.
A royalty fee is continuous fee paid by the franchisee to the franchiser usually based on a percentage of the franchisee’s gross revenue.

 

Difficulty: 1 Easy
Learning Objective: 05-06 Explain how to tell if a franchise is right for you.
 

 

71. What is a disclosure statement?

The Federal Trade Commission requires that a franchise give prospective franchisees a formal agreement and a Uniform Franchise Offering Circular (UFOC) at least 10 days before the contract is executed or before any money is paid. This prospectus or disclosure statement should provide background on the franchiser and its financial position; the financial requirements for a franchisee; and the restrictions, protections, and estimated earnings of the franchise. A franchiser’s formal offering circular can be downloaded from the World Wide Web.

 

Difficulty: 1 Easy
Learning Objective: 05-06 Explain how to tell if a franchise is right for you.
 

 

72. Describe some industries in the United States where franchising is expected to grow.

 

The industries that especially lend themselves to franchising are restaurants; motels; convenience stores; electronics; and automotive parts, accessories, and servicing.
The success of restaurants, especially those offering fast foods, is related to many variables, including demographic factors such as the high percentage of young adults and singles in the population and the increasing number of women working outside the home. Other factors that seem to have had a positive influence on franchised restaurant success are product appeal to a growing segment of the market, fast service, a sanitary environment, and buildings and signs that are easily recognizable.
The motel industry has experienced explosive growth since the interstate highway system began in 1956 and the growing affluence and mobility of Americans created a market for quality motels. The industry has grown from mom-and-pop units (with an often questionable image) to one dominated by large corporate empires. These corporations not only sell franchises to independent businesspeople but also operate some of the most profitable units themselves. Best Western is considered to have the largest number of establishments.
With the rapid growth in electronics fields such as music, video, TV, and computers, franchising has naturally followed. Today most businesses in the United States own at least one computer which indicates tremendous opportunities for franchises.

 

Difficulty: 2 Medium
Learning Objective: 05-07 Explain the future of franchising.
 

 

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