Franchising And Purchasing An Existing | Test Bank Ch.14

Entrepreneurship, 3e (Bamford)

Chapter 14 Franchising and Purchasing an Existing Business

1) Franchising is viewed as the creation of a new business from a well-established formula. 

2) A franchisor is a firm that originates the idea for a business and develops the operational methods.

3) A franchisor pays a fee to obtain a franchise. 

4) An entrepreneur is a franchisee.

5) A franchise agreement is a basic contract that usually contains clauses that require the purchase of supplies.

6) In 2016, the International Franchise Association reported that franchises made up almost 900,000 establishments in the United States, providing almost 9 million direct jobs.

7) A franchisor should provide a standard, well-known product.

8) A franchisor benefits by enabling a rapid expansion of his or her business, while maximizing the funds invested in that expansion.

9) A franchisee that has inconsistent quality or service not only hurts his or her own business but also impacts the brand images of all the other franchisees.

10) The initial fees for selling a franchise is a more important revenue source than the continuing revenue stream to a franchisor from royalties and selling of inputs to a franchisee.

11) A franchisor makes money when the franchisee stays in business, needs lots of inputs, and pays continuing royalties.

12) Each franchisor will have a different package to sell a franchisee.

13) Every sale between a franchisor and a franchisee must be governed by the United Franchise Act of 1987.

14) There is a universal standard regarding what is provided by a franchisor. Each franchisor can offer a unique package that is different from other franchisors.

15) A franchisor provides both the operational systems and the monetary techniques to run the business.

16) The more the training opportunities that are offered as part of a franchise fee, the better it is for the franchisee.

17) For a potential franchisee, depending on a franchisor for market analysis is the best tactics to understand a market.

18) A potential franchisee must be vetted, or evaluated, by a franchisor before receiving the complete United Form Offering Contract (UFOC).

19) The relationship between a franchisee and a franchisor is like a marriage.

20) Marketing advice is a qualitative area that is very helpful, independent of who is developing and delivering the research.

21) When buying an existing business, there is a greater premium attached to the business than if the business is started from scratch.

22) If an individual buys a troubled business, the first step is to restructure the business.

23) Business brokers are bankers who invest in financing small businesses.

24) Once negotiations for the sale and purchase of an existing business are complete and all contracts are signed, there will be a transition period.

25) There is a complex issue of organizing the process of change from a former business to a new business.

26) One advantage of buying an existing business instead of a franchise is that an existing business already has an established cash flow.

27) Buying an existing business does not take as much planning and thought as starting a business from scratch.

28) A disadvantage of buying an existing business is that operating processes and policies have already been established. This means that it is a riskier purchase than the purchase of a franchise.

29) During the transition period of the sale of an existing business, the new owner should spend significant time being visible in the business, talking with employees, making suggestions, and doing some of the more menial work.

30) The new owner of an existing business should avoid implementing new policies and standards during the transition period in order to avoid upsetting the employees.

31) Entrepreneurs should attempt to buy a troubled business at a discount even if they do not have specific skills and a plan to turn around a business that is in significant decline.

32) In franchising, an entity or individual granted the right to conduct business according to specified methods and terms of another party is known as a

A) franchisee.

B) franchisor.

C) franchise.

D) licensee.

33) In franchising, an entity or individual that grants another party the right to conduct business according to specified methods and terms is known as a

A) franchisor.

B) franchisee.

C) franchise.

D) licensor.

34) Yummy Bacon Inc. manufactures and sells bacon and sausages in the country of Valkyris. To expand its business, it invites interested entrepreneurs to open its branches in a few more cities. It also assures the prospective entrepreneurs that it will provide specific training in marketing and operational methods to all staffs in the new branches. In this scenario, Yummy Bacon Inc. is a ________.

A) franchise

B) franchisee

C) franchisor

D) master franchise

35) A leading apparel manufacturing firm in the United States invites applications to establish franchises in Texas. John, an entrepreneur, approaches the firm with a proposal. After doing routine background checks, the firm permits John to open a branch of the firm in a given area, use the firm's name, and operate a business within the guidelines of an agreement. In this scenario, John is a ________.

A) franchisor

B) franchisee

C) franchise

D) licensor

36) Which of the following is the basic contract generated by a franchisor for all franchises?

A) Franchise consent contract

B) Master license

C) Franchisor agreement

D) Franchise agreement

37) Which of the following is true of a franchise agreement made between a franchisor and a franchisee?

A) It directs the franchisor to spend significant time being visible in the new franchise operation, talking with employees, and making suggestions.

B) It contains clauses requiring the purchase of supplies and the displaying of marketing material.

C) It is enforced at the federal level, and the jurisdiction lies with the federal court.

D) It commands the franchisee to make all significant changes in one day so as to alleviate any lingering concerns by the employees.

38) Which of the following is a reason for the popularity of franchising in the business world?

A) A franchisor can offer a standard, well-known product that is produced by a consistent, well-tested process.

B) The profitability of individual franchises does not have to be shared with the franchisor.

C) Buying a franchise does not take as much planning and thought as starting a business from scratch.

D) There are no significant risks involved in buying a franchise as the losses will be compensated by the franchisor.

39) Identify an accurate statement about franchising.

A) A franchisor enables a rapid expansion while maximizing the funds invested in that expansion.

B) Specific information on the profitability of individual franchises does not have to be shared with the franchisor.

C) An entrepreneur spends more of his or her resources than if he or she had to start a new business from scratch.

D) A franchisor continues research and development on the products and processes that a small single business cannot afford to pursue.

40) The success of franchising is dependent on the hard work of the franchisee and the value of the ________.

A) owner

B) franchisor

C) lessee

D) licensee

41) A franchisor makes money by

A) selling the franchise.

B) collecting a percentage of sales.

C) providing specific training.

D) all of these.

42) When a franchisee delivers inconsistent quality, it hurts the company and the ________.

A) franchisees

B) business brokers

C) licensers

D) bankers

43) Which of the following rights is NOT a benefit of purchasing a franchise?

A) The right to open a branch of the business in a given area

B) The right to use the franchisor's name

C) The right to operate a business within the guidelines of the franchise agreement

D) All of these

44) Which of the following statements about the purchase of a franchise is NOT correct?

A) A franchisee has the right to change the operating procedures to improve the business's profitability in his or her territory.

B) A franchisee has the right to use the franchisor's brand name.

C) A franchisor provides operational advice to a franchisee.

D) A franchisor provides some level of marketing advice and assistance.

45) Which of the following is true of franchising?

A) A franchise is essentially an unpackaged business, where the policies, procedures, and buying patterns have to be established prior to beginning operations.

B) The purchase of a well-honed, thoughtfully positioned franchise can dramatically decrease the downside risk inherent in the process of starting a business.

C) There is no difference in the risk of buying a franchise and buying an existing business.

D) Franchising is viewed as a new business entrepreneur's creation of a business from scratch.

46) When entering a new industry through the purchase of a franchise, a small business owner should

A) examine the industry.

B) examine potential competitors.

C) examine position relative to other new franchises.

D) all of these.

47) An individual looking to buy a franchise should identify a franchisor that is the best potential match in

A) support.

B) history.

C) expansion plans.

D) all of these.

48) A franchisor and franchisee relationship is governed by the

A) United Franchise Optimum Contract.

B) United Franchise Offering Clauses.

C) United Franchise Offering Circular.

D) United Franchise Offering Contract.

49) When you buy a franchise, you are buying

A) an established name.

B) the opportunity to operate under that name for a period of time.

C) a single store or the right to have multiple units.

D) all of these.

50) ________ is a broad area that encompasses such things as brochures, signs, logos, television advertisements, newspaper advertisements, sales techniques, and internal business design.

A) Marketing information system

B) Decision support system

C) Accounting support

D) Marketing support

51) Which of the following documents specifies the information that must be provided to a franchisee prior to his or her investment?

A) Uniform Franchise Offering Circular

B) Enterprise Bargaining Agreement

C) Bilateral Investment Treaty

D) Multilateral Agreement on Investment

52) Items covered in the Uniform Franchise Offering Circular include all of the following EXCEPT

A) litigation.

B) bankruptcy.

C) investment requirements.

D) marketing goals.

53) The Uniform Franchise Offering Circular has ________ specified items.

A) 15

B) 18

C) 23

D) 28

54) Which of the following statements is true of a franchise process?

A) The founding of a franchise is quite different in form and method from creating a new business from scratch.

B) A market analysis by a franchisor is the best available method to understand a market and to organize franchise operations.

C) A significant up-front cash payment is necessary for making an initial fee payment by a franchisee.

D) The entrepreneur can easily leave the franchisee business if he or she does not enjoy the business venture.

55) A potential franchisee has to be ________ before receiving a complete Uniform Franchise Offering Circular.

A) bonded

B) vetted

C) researched

D) interviewed

56) Negotiations between a franchisee and a franchisor should explore

A) up-front capital requirements.

B) financing arrangements.

C) continuing fees.

D) all of these.

57) Franchisors make decisions based on what is best for

A) franchisors.

B) franchisees.

C) the total business.

D) none of these.

58) Franchisors typically provide the

A) operational systems.

B) monitoring techniques to run the business.

C) both of these.

D) none of these.

59) Businesses that specialize in selling businesses are known as

A) business representatives.

B) business analysts.

C) real estate agents.

D) business brokers.

60) New Ventures Co., a consulting firm, follows attorneys, trade associations, and bankruptcy filings in the United States to find businesses that can be bought. Then, they find prospective entrepreneurs who are interested in buying these businesses and sell these businesses for a margin. In this scenario, New Ventures Co. is a ________.

A) business representative

B) business analyst

C) business broker

D) research expert

61) During the transition period following the sale of an existing business, which of the following tasks needs to be completed?

A) Meet and discuss the transition with every member of the current staff.

B) Spend significant time being visible in the new operation.

C) Implement new metrics.

D) All of these

62) Identify an accurate statement about buying an existing business.

A) Buying an existing business does not take as much planning and thought as starting a business from scratch.

B) An entrepreneur has to discover the sources of cash flow after buying an existing business because there is no established cash flow.

C) An existing business has the benefit of having an established set of processes.

D) There is no difference in the risk of buying a franchise compared to starting a business from nothing but an idea.

63) Which of the following is NOT listed in the book as a good source of information for finding an existing business to purchase?

A) Bankruptcy filings

B) Trade associations

C) Attorneys and CPA firms

D) Bankers

64) Which of the following is true of the risk involved in buying an existing business facing bankruptcy?

A) It takes special knowledge and skills to conduct an effective turnaround.

B) The creditors of the previous owner ask for personal guarantee from a potential buyer and place his or her personal assets at risk.

C) Customers usually boycott the new owner due to their loyalty to the previous owner.

D) It requires certain legal procedures and court appeals to layoff the existing pool of employees under any conditions.

65) Which of the following should be accomplished by a new owner who purchased an existing business?

A) He or she should make all significant changes in one day so as to alleviate any lingering concerns by the employees.

B) He or she should devise layoff plans taking enough time so that he or she obtains the goodwill of the employees.

C) He or she should ensure the former owner comes to the business every day for at least 30 days following the sale.

D) He or she should wait for at least 6 months before informing customers and suppliers of the sale of the business.

66) The cost of a business should include

A) a premium for past performance.

B) a premium for future performance.

C) a premium for current performance.

D) none of these.

67) In franchising, the ________ is the firm that originates the idea for a business and develops the operational methods.

68) The ________ pays a fee to obtain a franchise from the franchisor.

69) The basic contract a franchisor provides to a franchisee is called a ________.

70) A(n) ________ usually contains clauses requiring the purchase of supplies from a franchisor, the displaying of marketing material, and the payment of fees that are based upon the sales of a branch operation.

71) A(n) ________ is a government-required document that clearly discloses aspects of the relationship between a franchisor and a franchisee.

72) A very important commitment a franchisee demands from a franchisor is to limit the number of ________ within a specific radius of the new franchise.

73) A franchisor typically provides ________ through such things as brochures, signs, logos, advertisements, and sales techniques.

74) A franchisor typically provides ________ to develop performance management programs, quality control methods, forecasting, and purchasing of equipment, which are very valuable services that act as guidelines rather than mandates in deciding on a franchise.

75) The typical time frame that a franchise agreement lasts is ________ years.

76) A business ________ specializes in selling businesses.

77) An existing business has an established ________ flow that the owner is offering to sell to a buyer.

78) What does an individual receive on purchasing a franchise?

79) What are the differences between a franchisor and a franchisee?

80) List the four ways that a franchisor makes money.

81) Describe the ways in which a franchisor and a franchisee help each other.

82) When buying a franchise, what issues should a potential franchisee examine?

83) What rights does a franchisee receive in exchange for purchasing a franchise?

84) What can a potential franchisee learn from current franchisees when researching the purchase of that franchise?

85) When buying a franchise, what are the specific areas that should be evaluated?

86) Why would an entrepreneur buy an existing business?