Ch5 Franchising Exam Prep

Test Bank

Chapter 5: Franchising

Multiple Choice

1. 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 ______.

a. deductive reasoning

b. preemptory investigation

c. due diligence

d. market research

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

2. Through the franchise agreement, the ______ gains the benefit of the parent company’s expertise, experience, management systems, marketing, and financial help.

a. franchisor

b. franchisee

c. leaser

d. lessee

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

3. A contractual license to operate an individually owned business as a part of a larger chain is known as a/an ______.

a. franchise

b. small business contract

c. chain contract

d. import contract

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

4. The parent company that develops a product or business process and sells the rights is known as the ______.

a. franchisor

b. franchisee

c. company of origin

d. opening company

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

5. The small business person who purchases the franchise in order to sell the product or service is known as the ______.

a. franchisor

b. franchisee

c. company of origin

d. opening company

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

6. Franchises have experienced growth since the 1950s, although they have existed since the ______.

a. late 1700s

b. early 1800s

c. late 1800s

d. early 1900s

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

7. 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 ______.

a. franchisor

b. franchisee

c. CEO

d. social entrepreneur

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

8. ______ and ______ were two of the first businesspeople to use exclusive agents, which laid the ground for today’s franchising.

a. Ford; Hoover

b. John Deere; Macy’s

c. McDonald’s; Hilton

d. McCormick; Singer

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

9. Today, franchising is represented in almost every industry, with more than ______ U.S. businesses being franchises.

a. 225,000

b. 800,000

c. 2.5 million

d. 25 million

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

10. Franchised businesses directly produce almost ______ jobs.

a. 1 million

b. 32 million

c. 5 million

d. 9 million

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

11. Product-distribution franchising involves licensing the use of its ______.

a. trade name

b. business format

c. turnkey

d. dealership

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

12. Making products available to consumers in a specific geographic region is the purpose of ______ franchising.

a. product-distribution

b. business-format

c. turnkey

d. dealership

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

13. A type of franchise in which the franchisee agrees to purchase the products of the franchisor or use the franchisor’s name is called ______.

a. product-distribution franchise

b. business-format franchise

c. dealership franchise

d. logo franchise

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

14. A type of franchise in which the franchisee adopts the franchisor’s entire method of operation is known as ______.

a. product franchising

b. trade-name franchising

c. business-format franchising

d. dealership franchising

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

15. Business-format franchising is commonly used in which of the following?

a. gasoline stations

b. soft-drink bottlers

c. car dealerships

d. fast-food restaurants and lodging establishments

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

16. 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?

a. product distribution

b. service distribution

c. manufacturing-format franchising

d. business-plan franchising

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

17. 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?

a. efficiency

b. financial assistance

c. professional guidance

d. proven product

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

18. The greatest benefit to the franchisee is which of the following?

a. proven product

b. marketing expertise

c. professional guidance

d. efficiency

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

19. 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 ______.

a. an opportunity to learn

b. market expertise

c. professional guidance

d. controlled expansion

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

20. Saving money on inventory needs, equipment, and supplies is an advantage for the franchisee that is called ______.

a. recognized standards

b. marketing expertise

c. efficiency

d. professional guidance

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

21. 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?

a. recognized standards

b. marketing expertise

c. efficiency

d. professional guidance

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

22. A problem with the cost of purchasing a franchise is that the franchisee is usually required to raise most of the capital ______.

a. before beginning operations

b. within one month of beginning operations

c. within six months of beginning operations

d. within one year of beginning operations

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

23. Because customers view franchises as an entire unit, which of the following can have a negative effect on a franchisee’s business?

a. overdependence or unsatisfied expectations

b. risk of fraud or misunderstanding

c. problems of termination or transfer

d. poor performance of other franchisees

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

24. From the perspective of the ______, the biggest advantage is the expansion of distribution sources with limited equity investments.

a. customer

b. employee

c. franchisor

d. franchisee

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

25. Other franchises under the same franchisor can detrimentally affect a franchise by ______.

a. tolerating substandard performance

b. opening a new franchise in another market

c. setting higher standards

d. not making a profit

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

26. 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 ______.

a. right of discontinuance

b. privilege of rescission

c. right of first refusal

d. right of denial

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

27. From the perspective of the franchisor, the biggest advantage of offering franchises is the ______.

a. expansion with limited equity investments

b. multiple sources of revenue

c. level of control of expansion

d. bulk purchasing

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

28. Franchising may be the only viable way for which of the following to expand?

a. sole proprietorships

b. businesses with limited capital

c. businesses wishing to enter international markets

d. partnerships

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

29. In comparison with expansion of a corporate chain, expanding via franchise can be accomplished with a/an ______ management structure.

a. simpler

b. equally complex

c. slightly more complex

d. highly complex

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

30. Which of the following can significantly reduce costs for a franchisee and thus increase profit margins?

a. controlled expansion

b. franchise fees

c. bulk purchasing

d. advertising costs

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

31. The biggest disadvantage to the franchisor is which of the following?

a. profit sharing

b. disputes with franchisees

c. loss of control

d. communication breakdowns

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

32. Which of the following is a way in which franchisors have adapted products to meet the changing needs of customers?

a. multiproduct shelving

b. corporate displays

c. establishing company-owned stores

d. family branding

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

33. Franchisors can achieve economies of scale as a result of which of these?

a. multiple sources of revenue

b. controlled expansion

c. motivated franchisees

d. bulk purchasing

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

34. The major trade association of franchising is the ______.

a. International Franchise Association

b. American Franchisee Association

c. American Association of Franchisees and Dealers

d. Global Franchise Association

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

35. The International Franchise Association publishes ______ annually, which gives requirements, expectations, and assistance capabilities for each franchise.

a. The Franchise Handbook

b. Current Franchises in Business

c. Potential Franchise Opportunities

d. The Franchisee Guide to Selecting a Franchise

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

36. The American Association of Franchisees and Dealers (AAFD) has developed a ______ as a code of ethical business conduct for franchised businesses.

a. franchisee bill of rights

b. franchisor code of conduct

c. franchisee constitution

d. franchisor disclosure statement

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Ethical understanding and reasoning

37. 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?

a. legal records

b. current and former franchisees

c. the franchisor

d. current customers

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

38. Franchisors are required by the ______ to provide disclosure statements to prospective or actual franchisees.

a. North American Free Trade Agreement

b. Uniform Commercial Code

c. National Labor Relations Act

d. Federal Trade Commission

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

39. Information that franchisors are required to provide to potential franchisees is contained in which of the following documents?

a. franchise agreement

b. purchasing contract

c. disclosure statement

d. profit-and-loss statement

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

40. Identification of risks, fees, benefits, and restrictions of operating a franchise would be included in the ______.

a. disclosure statement

b. franchise agreement

c. franchise contract

d. purchase agreement

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

41. 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 ______.

a. financial statement

b. contract

c. franchise agreement

d. disclosure statement

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

42. 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 ______.

a. litigation

b. justification

c. intellectual property

d. legal obligations

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

43. 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.

a. purchase obligations

b. product or service restrictions

c. personal participation of franchisees

d. exclusive territory

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

44. Franchisees have recently alleged that the franchisor has overlapped franchise areas. This is a breach of ______.

a. termination of the franchise agreement

b. due diligence

c. the exclusive territory rights

d. franchise fees

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

45. 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?

a. city

b. county

c. state

d. region

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

46. The legal contract that binds both parties involved in the franchise is known as the ______.

a. franchise agreement

b. disclosure statement

c. contract

d. business obligation

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

47. Some franchise agreements specifically require the franchisee to have a percentage of the total franchise fee from which of the following?

a. a venture capitalist

b. a nonborrowed source

c. an accredited bank

d. the Small Business Administration (SBA)

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

48. The one-time payment made to become a franchisee is called a/an ______.

a. franchise agreement

b. franchise fee

c. royalty fee

d. initial investment fee

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

49. The ongoing payments that franchisees pay to franchisors--which is usually a percentage of gross sales--is known as a/an ______.

a. franchise agreement

b. franchise fee

c. royalty fee

d. initial investment fee

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

50. Royalty fees are calculated as a percentage of ______.

a. gross sales

b. gross profit

c. net profit

d. pretax revenue

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

51. 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 ______.

a. forced contract

b. franchise agreement

c. disclosure statement

d. due diligence statement

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Medium

TOP: AACSB Standard: Reflective thinking

52. 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 ______.

a. franchise fee

b. industry fee

c. royalty fee

d. due diligence fee

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

53. Most franchise contracts run ______.

a. indefinitely

b. from 1 to 5 years

c. from 15 to 20 years

d. from 5 to 15 years

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

54. Before signing a franchise agreement, a franchisee should make sure that the franchisor must show ______ to terminate the contract.

a. real cause

b. due diligence

c. good cause

d. cause clause

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

55. Which of the following sections in the franchise agreement contains information on rights of first refusal, advertising restrictions, and performance quotas?

a. termination of the franchise agreement

b. terms and renewal of the agreement

c. exclusive territory

d. franchise, advertising, and royalty fees

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

NARRBEGIN: 5-1

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.

NARREND

56. In Scenario 5-1, which of the following would be the major disadvantage for Connie in purchasing a franchise?

a. potential for business growth

b. restrictions on her freedom and creativity

c. marketing expertise

d. quality control standards

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

NAR: 5-1

57. In Scenario 5-1, which of the following types of franchises is the bakery franchise?

a. product franchising

b. business-format franchising

c. service franchising

d. joint venture

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

NAR: 5-1

58. In Scenario 5-1, which of the following advantages from the franchisor would benefit Connie the most?

a. quality product

b. efficiency

c. professional guidance

d. an opportunity to learn

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

NAR: 5-1

NARRBEGIN: 5-2

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.

NARREND

59. In Scenario 5-2, the document that she is carefully considering is the ______.

a. franchise legal contract

b. franchise agreement

c. business contract

d. partnership agreement

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

NAR: 5-2

60. In Scenario 5-2, 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 ______.

a. franchise fees

b. royalty fees

c. advertising fees

d. operation fees

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

NAR: 5-2

61. In Scenario 5-2, Connie is concerned that the bakery franchise did not open other outlets within 10 miles of the mall. She is concerned about ______.

a. termination of the franchise agreement

b. exclusive territory

c. terms and renewal of the agreement

d. mutual territory

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

NAR: 5-2

62. In Scenario 5-2, after reading through the agreement, everything seems clear to Connie. Is there anyone else she should have read the agreement?

a. her friends at work

b. her CPA and lawyer

c. her friends and a lawyer

d. her friends and her CPA

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

NAR: 5-2

63. In Scenario 5-2, the FTC requires all franchisors to provide which of the following for potential franchise owners?

a. statements of information

b. income statements

c. disclosure statements

d. franchise statements

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Reflective thinking

NAR: 5-2

True/False

1. 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.

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

2. Franchising dominates the quick-service restaurant segment of the U.S. economy.

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

4. Franchised businesses directly produce almost 6 million jobs.

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

8. The biggest advantage of franchising for a franchisee is the marketing expertise that is provided.

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

11. Franchisors seldom provide financial resources for startup and working capital for inventory.

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

14. 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.

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

15. 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.

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

16. 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.

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

19. The American Franchisee Association is a trade association that provides information and services about franchising.

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

20. 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.

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

21. 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.

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

22. 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.

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

25. 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.

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

28. The issue of exclusive territory is the subject of much controversy in the franchising world.

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Knowledge

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

Short Answer

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

KEY: Learning Objective: 5.1: Explain what a franchise is and how it operates.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 5.1: About Franchising

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 5.2: Compare the advantages and disadvantages of franchising.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 5.2: Why Open a Franchise?

Difficulty Level: Easy

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking

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

KEY: Learning Objective: 5.3: Explain how to evaluate a potential franchise opportunity.

REF: Cognitive Domain: Comprehension

Answer Location: Concept Module 5.3: Selecting a Franchise

Difficulty Level: Medium

TOP: AACSB Standard: Analytical thinking