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Franchises & Buyouts

T/F You will lose some of your financial independence when you franchise because the contract will control how you run the business
True
The _________, who lends the trademark or trade name and a business system
Franchisor
The ________, who pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system
Franchisee
________ is the contract binding the two parties
Franchise
T/F One of the advantages of buying a franchise is that the purchaser has access to a proven business
system.
True
T/F A franchise is typically attractive because it offers training, financial assistance, and operating
benefits.
True
T/F A disadvantage of purchasing a franchise is that franchisors seldom provide adequate training
programs.
False– Results show that most franchisors provide training
Which characteristic is not considered a positive of franchising?
a. higher success rates than for alternative methods.
b. entrepreneurial independence.
c. financial and training assistance.
d. operating benefits.

B

A disadvantage of franchising is:
a. reduced risk of failure.
b. access to a proven system.
c. restricted sales territories.
d. immediate economies of scale.

C

An entrepreneur would choose a franchise over an independent startup most likely because of the:
a. freedom in decision making.
b. guidance provided for organizational structure.
c. probability of success.. opportunities to meet and share ideas with other executives.

C

The cost of a franchise may include
a. royalty payments.
b. higher operational costs.
c. a one-time federal franchise tax.
d. higher labor costs.

A

Investment costs related to franchising include all of the following except:
a. insurance premiums and legal fees.
b. inventory and supply costs.
c. building and equipment costs.
d. royalty payments.

D

Having worked professionally for 10 years, Tom and Kate have decided to start a new franchise.
Considering their background, a disadvantage for them becoming franchisees is
a. the restrictions on business operations.
b. unlimited company growth.
c. the expectation to work more than a 40 hour work week.
d. an increase in entrepreneurial independence.

A

An entity or individual granted the right to conduct business according to specified methods and terms
of another party is known as a
a. franchisor.
b. franchisee
c. franchise.
d. licensee.

B

The franchising strategy whereby an individual or firm is granted the legal right to own more than one
unit of a franchised business is known as
a. development franchising.
b. multiple-unit ownership.
c. piggyback franchising.
d. aggregate ownership.

B

Individuals or firms that possess the legal right to open multiple outlets in a given area are referred to
as:
a. development franchisees.
b. area developers.
c. piggyback franchisees.
d. multiple-unit owners.

B

A Starbucks franchise located inside a Target store is called ______ franchising.
a. folded
b. internalized
c. cooperative
d. piggyback

D

Which source of information is not recommended to help a potential franchisee investigate a
franchising opportunity?
a. The franchisors themselves
b. The franchisor suppliers
c. Existing and previous franchisees
d. Independent, third-party sources

B

What information is typically not found in a disclosure document?
a. The franchisor’s involvement in litigation
b. Key features of the franchisor’s experience
c. Details of the franchisor’s proprietary technology
d. The franchisor’s size

C

Franchise costs include all of the following expenses except
a. advertising costs.
b. investment costs.
c. royalty payments.
d. churning costs.

D

All of the following restrictions are considered management disadvantages of franchising except
a. requiring adherence to the operations manual.
b. requiring site approval and outlet appearance.
c. restricting goods and services offered for sale.
d. restricting advertising and hours of operation.

A

What question is the least important when developing a franchise from an independent business?
a. Who will develop the operations manual?
b. Is the business replicable?
c. How will growth be financed?
d. What expert assistance will be needed for legal matters?

A

Benefits of becoming a franchisee include all of the following items except
a. reduced risk of failure.
b. detailed operating manual.
c. management training.
d. reduction in control.

D

The disclosure statement provided to a prospective franchisee must contain all of the following
information except
a. franchisor’s finances.
b. experience in the market.
c. involvement in litigation.
d. strategic plans for future expansion.

D

Which of the following reasons for buying a business is also a reason for purchasing a franchise?
a. Reduction of uncertainty
b. Acquiring goodwill
c. Bargain price
d. Quick start

A

The Franchise Registry maintained by the U.S. Small Business Administration
a. lists warnings about certain franchise systems.
b. verifies a franchise system’s lending eligibility.
c. rates franchise systems according to a four star rating.
d. registers all franchise systems operating in the U.S.

B

A document called the _____ is the accepted format for satisfying franchise disclosure requirements
Franchise Disclosure Document
Most franchise experts recommend that the FDD be examined carefully by:
a. regulators that specialize in such documents.
b. a franchise attorney and an accountant.
c. everyone associated with the potential startup.
d. suppliers that may be used if the startup is successful.

B

Which consideration need to be well thought out before deciding to franchise a business?
1. Is the business model replicable?
2. What will be included in the operations manual?
3. How will the growth be financed?
_________ is a specialized broker who handles all arrangements for closing a buyout.
A matchmaker
Which practice is a competitive concern for franchisees?
Enroachment
List and describe the cost components of becoming a franchisee.
1. Initial franchise fee: may range from several hundred to several thousand dollars.
2. Investment costs: renting or building an outlet, stocking it with inventory and equipment, insurance
premiums, legal fees and other startup expenses.
3. Royalty payments: charged to the franchisee by the franchisor, calculated as a percentage of the
gross income.
4. Advertising costs: many franchisees contribute to an advertising fund to promote the franchise, generally 1 to 2 percent of sales
T/F There is no need to find out more information about a prospective franchise as the franchisor should be
the primary source of information.
False– This information will be a primary source but more information should be obtained. The information
from the franchisor is being used to promote the franchise.
T/F A franchise organization that is registered with the U.S. Small Business Administration will greatly
speed up loan processing for a franchisee
True

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