Preview Extract
Chapter 15 Franchising
1) College Nannies and Tutors, the company profiled in the opening feature for Chapter 15, was
started by Joseph Keeley, a student at St. Thomas University in St. Paul, Minnesota. According
to the feature, Keeley met Peter Lytle, the angel investor who funded his startup, at:
A) an alumni event for a community college they both attended
B) a Small Business Development Center workshop
C) a Chamber of Commerce event in Minneapolis
D) the awards ceremony for a business plan competition that Keeley won
E) a social event for aspiring entrepreneurs and investors sponsored by the city of St. Paul
Answer: D
Rationale:
The correct answer is D. This is because the feature in the textbook states that Keeley met Peter
Lytle at the awards ceremony for a business plan competition that Keeley won.
2) Which of the following statements is incorrect regarding franchising?
A) Franchising is growing in popularity in the United States.
B) There are some instances in which franchising is not appropriate.
C) New technologies are often introduced through franchise systems.
D) Franchising, by its very nature, involves the sharing of knowledge between a franchisor and a
franchisee.
E) The failure rate for franchise systems is relatively high.
Answer: C
Rationale:
The correct answer is C. This statement is incorrect because franchising is not primarily a
method for introducing new technologies. Rather, it is a method of business expansion and
distribution.
3) According to the textbook, in 2007 over ________ individual franchise outlets were operating
in the United States.
A) 510,000
B) 765,000
C) 880,000
D) 1.3 million
E) 2.0 million
Answer: B
Rationale:
The correct answer is B. According to the textbook, in 2007, there were over 765,000 individual
franchise outlets operating in the United States.
4) ________ is a form of business ownership in which a firm that already has a successful
product or service licenses its trademark and method of doing business to other businesses in
exchange for an initial franchise fee and an ongoing royalty.
A) Licensing
B) Joint Venturing
C) Contracting
D) Subcontracting
E) Franchising
Answer: E
Rationale:
The correct answer is E. Franchising is a form of business ownership where a firm licenses its
trademark and method of doing business to other businesses in exchange for fees and royalties.
5) Franchising is a form of business ownership in which a firm that already has a successful
product or service licenses its trademark and method of doing business to another business in
exchange for:
A) an initial franchise fee and an ongoing royalty
B) a one-time franchise fee
C) an equity position in the new business
D) an ongoing royalty
E) an initial franchise fee and an equity position in the new business
Answer: A
Rationale:
The correct answer is A. Franchising involves the payment of an initial franchise fee and
ongoing royalties by the franchisee to the franchisor.
6) According to the textbook, one of the first companies in the United States to utilize
franchising was:
A) McDonald's
B) Singer Sewing Machine
C) H&R Block
D) Coca-Cola
E) Gold's Gym
Answer: B
Rationale:
The correct answer is B. According to the textbook, Singer Sewing Machine was one of the first
companies in the United States to utilize franchising.
7) There are two distinctly different types of franchise systems:
A) product trademark franchise, business arrangement franchise
B) product plus franchise, business format franchise
C) business design franchise, product improvement franchise
D) product extension franchise, business design franchise
E) product trademark franchise, business format franchise
Answer: E
Rationale:
The correct answer is E. The two distinctly different types of franchise systems are product
trademark franchise and business format franchise.
8) A ________ franchise is an arrangement under which the franchisor grants to the franchisee
the right to buy its products and use its trade name.
A) product and trademark
B) product extension
C) business format
D) production plus
E) business design
Answer: A
Rationale:
The correct answer is A. A product and trademark franchise grants the franchisee the right to buy
products and use the franchisor's trade name.
9) Betty Collins has been a Ford dealer for the past 20 years. Betty owns a:
A) business format franchise
B) product and trademark franchise
C) business design franchise
D) product plus franchise
E) product and business format franchise
Answer: B
Rationale:
The correct answer is B. Betty Collins, as a Ford dealer, owns a product and trademark franchise.
10) Which of the following statements is incorrect regarding product and trademark franchises?
A) Rather than obtaining a royalty or franchise fee, the product and trademark franchisor obtains
the majority of its income from selling its products to its dealers or distributors at a markup.
B) General Motors establishes product trademark rather than business format franchises.
C) Product trademark franchises are by far more popular than business format franchises.
D) Product and trademark franchisees are typically permitted to operate in a fairly autonomous
manner.
E) A product trademark franchise typically connects a single manufacturer with a network of
dealers or distributors.
Answer: C
Rationale:
The correct answer is C. Product trademark franchises are not by far more popular than business
format franchises. Both types of franchises are popular, but business format franchises are more
prevalent in many industries.
11) Clark Jensen recently opened a Planet Smoothie franchise. So far, he is very satisfied with
Planet Smoothie because in exchange for an initial franchise fee and an ongoing royalty
payment, Planet Smoothie has provided Clark a formula for doing business along with training,
advertising, and other forms of assistance. Clark purchased a ________ franchise.
A) business extension
B) formula driven
C) sales extension
D) business format
E) product and trademark
Answer: D
Rationale:
The correct answer is D. Clark purchased a business format franchise, which provides him with a
formula for doing business along with training, advertising, and other forms of support.
12) Which of the following statements is incorrect regarding business format franchises?
A) Arby's sells business format franchises.
B) A business format franchise can be very rigid and demanding.
C) Automotive services and convenience stores are well-known examples of business format
franchises.
D) In a business format franchise, the franchisor provides a formula for doing business to the
franchisee along with training and other forms of support.
E) The business format franchisor obtains the majority of its income from selling its products to
its dealers at a markup.
Answer: E
Rationale:
The correct answer is E. This statement is incorrect because the business format franchisor does
not obtain the majority of its income from selling its products to its dealers at a markup. Instead,
the franchisor's income comes from franchise fees and royalties.
13) A(n) ________ involves the sale of a single franchise for a specific location.
A) individual franchise agreement
B) one-of-a-kind franchise agreement
C) pinpoint franchise agreement
D) specific franchise agreement
E) precise franchise agreement
Answer: A
Rationale:
The correct answer is A. An individual franchise agreement involves the sale of a single
franchise for a specific location.
14) Phil Atkinson recently entered into an agreement with Sonic to open seven Sonic Fast-Food
Restaurant franchises. According to the agreement that Phil entered into, he has the right to open
up to seven Sonic Fast-Food Restaurant franchises within the city limits of Portland, Oregon.
Phil has entered into a(n):
A) individual franchise agreement
B) area franchise agreement
C) locality franchise agreement
D) district franchise agreement
E) neighborhood franchise agreement
Answer: B
Rationale:
The correct answer is B. Phil has entered into an area franchise agreement, which grants him the
right to open multiple franchises within a specific area.
15) A master franchisee, in addition to having the right to open and operate a specific number of
locations in a particular area, also has the right to:
A) stop making royalty payments if its sales decline
B) sell products made by companies other than the franchisor
C) offer and sell the franchise to other people in its area
D) use its own operating manuals to run its franchise outlets
E) stop making royalty payments if it is losing money
Answer: C
Rationale:
The correct answer is C. A master franchisee has the right to offer and sell the franchise to other
people in its area, acting as a subfranchisor.
16) The people who buy franchises from master franchises are typically called:
A) minor franchisees
B) secondary franchisees
C) mini-franchisees
D) subordinate franchisees
E) subfranchisees
Answer: E
Rationale:
The correct answer is E. The people who buy franchises from master franchises are typically
called subfranchisees.
17) An individual who owns and operates more than one outlet of the same franchisor, whether
through an area or a master franchise agreement, is referred to as a:
A) multifaceted franchisee
B) super franchisee
C) various-unit franchisee
D) compound franchisee
E) multiple-unit franchisee
Answer: E
Rationale:
The correct answer is E. An individual who owns and operates more than one outlet of the same
franchisor is referred to as a multiple-unit franchisee.
18) Franchising is appropriate when:
A) a firm's business methods are not polished, it has a desire to grow, and it is trying to
commercialize a technology product
B) a firm has a strong trademark, a desire to grow, and a well-designed business method
C) a firm is trying to commercialize a technology product, it is well-funded, and it has a desire to
grow
D) a firm has a weak trademark, it is well-funded, and it has a desire to grow
E) a firm has a desire to grow, it has a well-designed business method, and it is well-funded
Answer: B
Rationale:
The correct answer is B. Franchising is appropriate when a firm has a strong trademark, a desire
to grow, and a well-designed business method.
19) Which of the following companies would not be suitable for franchising?
A) College Nannies & Tutors
B) Smoothie King
C) McDonald's
D) H&R Block
E) Home Depot
Answer: E
Rationale:
The correct answer is E. Home Depot would not be suitable for franchising because it is a large
retail home improvement store that operates using company-owned stores rather than a
franchising model.
20) The Savvy Entrepreneurial Firm feature in Chapter 15 focuses on Wahoo's Fish Taco, a
franchise organization that offers Mexican food mixed with Brazilian and Asian flavors.
According to the feature, one of things the founders of Wahoo did that has contributed to its
success is:
A) elect to make Wahoo's a relatively slow growth system, focusing on branding and service
quality rather than rapid growth
B) elect to make Wahoo's a nationwide system, operating in all 50 states
C) elect to make Wahoo's an extremely affordable system to buy into, with a $9,000 original
franchise fee and an ongoing royalty of only 2 1/2 percent.
D) elect to make Wahoo's a niche franchise that is only available in theme parks and food courts
of malls
E) elect to make Wahoo's a fast growth system to establish a clear first-mover advantage in its
niche
Answer: A
Rationale:
The correct answer is A. According to the feature, one of the things the founders of Wahoo's did
that has contributed to its success is to make it a relatively slow growth system, focusing on
branding and service quality rather than rapid growth.
21) According to our textbook, which of the following is not a quality to look for in prospective
franchisees?
A) individual, rather than team-oriented
B) ability to follow instructions
C) experience in the industry in which the franchisee operates
D) ability to operate with minimal supervision
E) adequate financial resources and a good credit history
Answer: A
Rationale:
The correct answer is A. The textbook likely emphasizes the importance of team-oriented
individuals who can work within a franchise system rather than independently.
22) According to a concept called ________ theory, it is more effective for the units of a
growing chain to be run by franchisees than by managers, because managers are usually paid a
salary and may not be as committed to the success of their individual units as franchisees, who
are in effect the owners of the units they manage.
A) agency
B) stimulus
C) control
D) leadership
E) motivation
Answer: A
Rationale:
The correct answer is A. Agency theory suggests that franchisees, as owners of their units, are
more motivated to ensure their success compared to managers who are typically paid a salary.
23) According to the textbook, from the franchisor's point of view, the primary disadvantage of
franchising is that:
A) it is not legal in 11 states
B) an organization allows others to profit from its trademark and business method
C) franchise organizations consistently make less money than alternative forms of business
ownership
D) it typically takes longer to grow an organization via franchising than company-owned stores
E) the franchisees, rather than the franchisor, typically make most of the money
Answer: B
Rationale:
The correct answer is B. This is because franchising allows others to profit from the franchisor's
trademark and business method, which could be seen as a disadvantage by the franchisor.
24) Because franchisees put their personal capital at risk, they are highly motivated to make their
franchise outlets successful. According to the textbook, this advantage of franchising a business
is referred to as:
A) franchisee owner-incentive
B) franchisee impulse
C) agency theory
D) institutional theory
E) franchisee motivation
Answer: E
Rationale:
The correct answer is E. Franchisee motivation refers to the fact that franchisees are highly
motivated to make their outlets successful because they have invested their personal capital in
the business.
25) Which of the following was not identified in the textbook as one of the disadvantages of
franchising a business?
A) loss of control
B) friction with franchisees
C) franchisee motivation
D) differences in required business skills
E) legal expenses
Answer: C
Rationale:
The correct answer is C. Franchisee motivation is typically seen as an advantage rather than a
disadvantage of franchising.
26) The What Went Wrong feature in Chapter 15 focuses on Curves International, the fitness
center for women. Over the past three years, nearly one-third of Curves' 7,700 franchises have
closed. Which of the following reasons was not identified in the feature as one of the possible
explanations for why so many Curves centers have closed?
A) a turnover in the company's management
B) the poor economy
C) cheaper competition
D) the company failed to keep up with changing trends, including more flexible hours for busy
working women
E) the company sold too many franchises that are located too close together
Answer: A
Rationale:
The correct answer is A. The feature did not identify a turnover in the company's management as
one of the possible explanations for the closure of Curves centers.
27) According to the textbook, which of the following is not a cost that is typically associated
with buying a franchise?
A) intellectual capital fees
B) capital requirements
C) continuing royalty payment
D) advertising fees
E) initial franchise fee
Answer: A
Rationale:
The correct answer is A. Intellectual capital fees are not typically associated with buying a
franchise.
28) Which of the following statements is not correct regarding the costs associated with
purchasing a franchise?
A) The franchisee typically pays a royalty based on a percentage of weekly or monthly net
income.
B) Capital costs vary by franchisor, but may include the cost of buying land and building a
building.
C) Additional fees may be charged for activities such as training staff, providing management
expertise when needed, and providing computer assistance.
D) Franchisees are often required to pay into a national or regional advertising fund.
E) The initial franchise fee varies, depending on the franchisor.
Answer: A
Rationale:
The correct answer is A. The franchisee typically pays a royalty based on a percentage of weekly
or monthly gross income, not net income.
29) According to the textbook, a franchisee's weekly or monthly royalty fees are typically around
________ of gross income.
A) 1%
B) 3%
C) 5%
D) 7%
E) 9%
Answer: C
Rationale:
The correct answer is C. A franchisee's weekly or monthly royalty fees are typically around 5%
of gross income.
30) In the majority of cases, a franchisee pays the franchisor a royalty based on:
A) a predetermined fixed weekly or monthly amount
B) weekly or monthly net income
C) the size of the franchise outlet
D) weekly or monthly gross income
E) the age of the franchise outlet
Answer: D
Rationale:
The correct answer is D. In the majority of cases, a franchisee pays the franchisor a royalty based
on weekly or monthly gross income.
31) Which of the following statements is incorrect regarding the franchisor-franchisee
relationship?
A) A franchisee may be charged a fee for additional training.
B) Some franchisors require a new franchisee to pay a "grand opening" fee.
C) Franchisees are often required to pay into a national or regional advertising fund.
D) Weekly or monthly royalty fees are usually around 2% of net income.
E) Franchisees may have to pay a monthly royalty even if the business is losing money.
Answer: D
Rationale:
The correct answer is D. Weekly or monthly royalty fees are typically a percentage of gross
income, not net income.
32) The Partnering for Success feature in Chapter 15 focuses on how franchise organizations can
boost their sales while at the same time reduce their expenses. The technique that the feature
recommends to achieve these dual objectives is:
A) strategic alliances
B) joint ventures
C) outsourcing
D) licensing
E) cobranding
Answer: E
Rationale:
The correct answer is E. Cobranding is the technique recommended in the feature to boost sales
and reduce expenses.
33) There are two primary advantages to buying a franchise over other forms of business
ownership. First, franchising provides an entrepreneur the ability to own a business using tested
and refined business methods, and second:
A) franchising is almost a sure way of making a profit
B) a franchise agreement is typically easy to exit if expectations aren't met
C) franchisors typically encourage creativity on the part of franchisees
D) the franchisor typically provides training, technical expertise, and other forms of support
E) franchise organizations are consistently more profitable than non-franchise organizations in
the same industry
Answer: D
Rationale:
The correct answer is D. The second advantage of buying a franchise is that the franchisor
typically provides training, technical expertise, and other forms of support.
34) According to the textbook, the main disadvantage of buying a franchise is:
A) franchise organizations typically grow slower than non-franchise organizations in the same
industry
B) franchisors typically provide poor levels of support
C) the cost involved
D) the service sector of the U.S. economy is waning in importance
E) franchising is waning in its popularity
Answer: C
Rationale:
The correct answer is C. The main disadvantage of buying a franchise, according to the textbook,
is the cost involved.
35) Which of the following is not an advantage of buying a franchise?
A) a proven product or service within an established system
B) franchisor ongoing support
C) availability of financing
D) potential for business growth
E) duration and nature of the commitment
Answer: E
Rationale:
The correct answer is E. The duration and nature of the commitment are not typically considered
advantages of buying a franchise.
36) Which of the following is not a disadvantage of buying a franchise?
A) cost of the franchise
B) duration and nature of the commitment
C) restrictions on creativity
D) availability of financing
E) potential for failure
Answer: D
Rationale:
The correct answer is D. Availability of financing is not typically considered a disadvantage of
buying a franchise.
37) The statute that regulates franchising at the federal level is:
A) Federal Trade Commission Rule 436
B) Congressional Statute 399
C) SEC Statute 23
D) Congressional Amendment 442
E) SEC Fairness in Franchising Act
Answer: A
Rationale:
The correct answer is A. Federal Trade Commission Rule 436 regulates franchising at the federal
level.
38) To avoid making a hasty judgment, a franchisee may not purchase a franchise for ________
from the time the Franchise Disclosure Document is received.
A) 1 day
B) 3 days
C) 10 days
D) 14 days
E) 30 days
Answer: D
Rationale:
The correct answer is D. A franchisee may not purchase a franchise for 14 days from the time the
Franchise Disclosure Document is received to avoid making a hasty judgment.
39) Franchisors are required by law to disclose all their costs in a document called the:
A) Fairness in Franchising Certificate
B) Consistent Franchise Offering Code
C) Standardized Franchise Code
D) Franchise Disclosure Document
E) Franchise Code of Conduct
Answer: D
Rationale:
The correct answer is D. Franchisors are required by law to disclose all their costs in a document
called the Franchise Disclosure Document.
40) The Franchise Disclosure Document is accepted in (or by):
A) 11 states
B) all 50 states, all of Canada, and parts of Mexico
C) 39 states and all of Canada
D) all 50 states and parts of Canada
E) all nations participating in the North America Free Trade Agreement
Answer: D
Rationale:
The correct answer is D. The Franchise Disclosure Document is accepted in all 50 states and
parts of Canada.
41) The FDD contains ________ categories of information.
A) 5
B) 15
C) 23
D) 33
E) 41
Answer: C
Rationale:
The correct answer is C. The Franchise Disclosure Document (FDD) typically contains 23
categories of information, as required by the Federal Trade Commission (FTC).
42) The document that consummates the sale of a franchise is called the:
A) Franchise Disclosure Document
B) franchise agreement
C) license agreement
D) Uniform Franchise Licensing Code
E) franchise circular
Answer: B
Rationale:
The correct answer is B. The franchise agreement is the document that consummates the sale of a
franchise, outlining the terms and conditions of the franchise relationship.
43) While franchise agreements vary, each agreement typically contains two sections:
A) the statutory agreement and the purchase agreement
B) the franchise agreement and the buy agreement
C) the buy agreement and the membership agreement
D) the procurement agreement and the statutory agreement
E) the purchase agreement and the franchise agreement
Answer: E
Rationale:
The correct answer is E. While franchise agreements vary, each agreement typically contains the
franchise agreement and the purchase agreement.
44) While franchise agreements vary, each agreement typically contains the franchise agreement
and:
A) the legal agreement
B) the procurement agreement
C) the purchase agreement
D) the sell agreement
E) the conversion agreement
Answer: C
Rationale:
The correct answer is C. While franchise agreements vary, each agreement typically contains the
franchise agreement and the purchase agreement.
45) In addition to FTC disclosure requirements, ________ states have laws providing additional
protection to franchisees.
A) 6
B) 10
C) 15
D) 33
E) 47
Answer: C
Rationale:
The correct answer is C. Fifteen states have laws providing additional protection to franchisees,
in addition to the Federal Trade Commission (FTC) disclosure requirements.
46) According to a recent FTC report, instances of problems between franchisors and their
franchisees tend to be:
A) prevalent practices
B) isolated occurrences
C) There have been no reported problems between franchisors and their franchisees.
D) prevalent practices for product and trademark franchise systems and isolated occurrences for
business format franchise systems
E) isolated occurrences for product and trademark franchise systems and prevalent practices for
business format franchise systems
Answer: B
Rationale:
The correct answer is B. According to the FTC report, instances of problems between franchisors
and their franchisees tend to be isolated occurrences.
47) International opportunities for franchising are becoming:
A) less prevalent
B) neither more nor less prevalent
C) more prevalent for product and trademark franchise systems and less prevalent for business
format franchise systems
D) more prevalent
E) less prevalent for product and trademark franchise systems and more prevalent for business
format franchise systems
Answer: D
Rationale:
The correct answer is D. International opportunities for franchising are becoming more
prevalent, indicating an increasing trend in international franchising.
48) In regard to international franchising, under a(n) ________, the U.S. franchisor grants the
rights to an individual or company (the developer) to develop multiple franchised businesses
within a country or territory.
A) indirect franchise agreement
B) global franchise agreement
C) concurrent franchise agreement
D) direct franchise agreement
E) express franchise agreement
Answer: D
Rationale:
The correct answer is D. Under a direct franchise agreement, the U.S. franchisor grants the rights
to develop multiple franchised businesses within a country or territory.
49) Kim Baker just purchased the rights to develop multiple School of Rock franchises in
England. Kim just purchased a(n):
A) concurrent franchise arrangement
B) indirect franchise arrangement
C) lateral franchise arrangement
D) direct franchise arrangement
E) subordinate franchise arrangement
Answer: D
Rationale:
The correct answer is D. Kim Baker just purchased a direct franchise arrangement, granting her
the rights to develop multiple School of Rock franchises in England.
50) In the context of international franchising, under a ________ franchise arrangement, the U.S.
firm grants the rights to an individual or company (the master franchisee) to develop one or more
franchise businesses and to license others to develop one or more franchise businesses within the
country.
A) master
B) direct
C) subordinate
D) concurrent
E) multinational
Answer: A
Rationale:
The correct answer is A. Under a master franchise arrangement, the U.S. firm grants the rights to
develop one or more franchise businesses and to license others to develop one or more franchise
businesses within the country.
51) Franchising is a form of business organization in which a firm that already has a successful
product or service licenses its trademark and method of doing business to other businesses in
exchange for an initial franchise fee and an ongoing royalty.
Answer: True
Rationale:
Franchising is indeed a form of business organization where an established firm (franchisor)
grants a license to another party (franchisee) to use its trademark and business model for a fee.
52) A business format franchise typically connects a single manufacturer with a network of
dealers or distributors.
Answer: False
Rationale:
A business format franchise involves the franchisor providing the franchisee with a formula for
doing business, including training, support, and other assistance. It is not limited to connecting a
single manufacturer with a network of dealers or distributors.
53) The business format franchise is a more popular approach to franchising than the product and
trademark franchise.
Answer: True
Rationale:
Business format franchises, which provide a complete business format including training and
support, are more popular than product and trademark franchises, which primarily involve the
sale of products under a common brand.
54) In a business format franchise, the franchisor provides a formula for doing business to the
franchisee along with training, advertising, and other forms of assistance.
Answer: True
Rationale:
Yes, in a business format franchise, the franchisor provides a comprehensive business format to
the franchisee, including training, advertising support, and other forms of assistance.
55) Business format franchises typically allow franchisees substantial flexibility in how they run
their individual franchise units.
Answer: False
Rationale:
Business format franchises often have strict guidelines and standards that franchisees must
adhere to, reducing the flexibility in how they run their units.
56) An area franchise agreement allows a franchisee to own and operate a specific number of
outlets in a particular geographic area.
Answer: True
Rationale:
An area franchise agreement grants a franchisee the right to own and operate a specific number
of outlets within a defined geographic area.
57) The people who buy franchises from master franchisees are typically called employeefranchisees.
Answer: False
Rationale:
The correct term for individuals who buy franchises from master franchisees is subfranchisees or
sub-franchisees, not employee-franchisees.
58) Despite its advantages, franchising is not a popular form of business growth.
Answer: False
Rationale:
Franchising is a popular form of business growth due to its advantages such as rapid expansion,
shared risk, and local knowledge of franchisees.
59) Target is an example of an organization that is perfectly suited for franchising, but it doesn't
franchise.
Answer: False
Rationale:
Target is not suited for franchising because its business model relies on consistency and control
over its stores, which would be difficult to maintain through franchising.
60) An individual who is team oriented is typically a good candidate to be a franchisee.
Answer: True
Rationale:
Franchisees often need to work within a structured system and collaborate with others, making a
team-oriented individual a good candidate for a franchisee.
61) The primary disadvantage of franchising is that an organization allows others to profit from
its trademark and business method.
Answer: True
Rationale:
The primary disadvantage of franchising is indeed that the franchisor allows others (franchisees)
to profit from its trademark and business method in exchange for fees and royalties.
62) A management concept called agency theory refutes the value of franchising for
organizations with multiple units, like restaurant chains.
Answer: False
Rationale:
Agency theory actually supports the value of franchising for organizations with multiple units, as
franchisees, who are in effect the owners of their units, are more motivated to ensure their
success compared to hired managers.
63) In the majority of cases, a franchisee pays a royalty based on a percentage of weekly or
monthly net income.
Answer: False
Rationale:
In the majority of cases, a franchisee pays a royalty based on a percentage of weekly or monthly
gross income, not net income.
64) Franchisees are often required to pay into a national or regional advertising fund, even if the
advertisements are directed at goals other than promoting the franchisor's product or service.
Answer: True
Rationale:
Franchisees are typically required to contribute to a national or regional advertising fund to
support marketing efforts, even if the advertisements are not specifically promoting the
franchisor's product or service.
65) The royalty fees a franchisee pays are usually around 10 percent of gross income.
Answer: False
Rationale:
The royalty fees a franchisee pays can vary widely but are typically between 4% and 8% of gross
income, not 10%.
66) One of the most important questions a prospective franchisor should consider is whether the
fees and royalties charged by a franchisor are consistent with the franchise's value or worth.
Answer: True
Rationale:
It is important for a prospective franchisor to ensure that the fees and royalties charged are in line
with the value and support provided by the franchisor to the franchisee.
67) The Franchise Disclosure Document contains a total of 23 categories of information that give
a prospective franchisee a broad base of information about the background and financial health
of the franchisor.
Answer: True
Rationale:
The Franchise Disclosure Document (FDD) typically contains 23 categories of information,
providing prospective franchisees with detailed information about the franchisor's background,
financial health, and other relevant information.
68) Franchisors are required by law to disclose all their costs in a document called the Franchise
Disclosure Document.
Answer: True
Rationale:
Franchisors are required by law to disclose all costs associated with purchasing and operating a
franchise in the Franchise Disclosure Document.
69) The franchise agreement, or contract, is the document that consummates the sale of a
franchise.
Answer: True
Rationale:
The franchise agreement is the legal document that finalizes the sale of a franchise, outlining the
terms and conditions of the franchise relationship between the franchisor and the franchisee.
70) The majority of franchisors are highly ethical individuals who are interested only in making
a fair return on their investment.
Answer: True
Rationale:
While there may be exceptions, the majority of franchisors are indeed ethical individuals who are
focused on building successful franchise systems and providing support to their franchisees.
71) What is the difference between a product and trademark franchise and a business format
franchise? Which type of franchise is most common for entrepreneurial firms?
Answer: A product and trademark franchise is an arrangement in which the franchisor grants to
the franchisee the right to buy its products and use its trade name. This approach typically
connects a single manufacturer with a network of dealers or distributors. For example, General
Motors has established a network of dealers that sell GM cars and use the GM trademark in their
advertising and promotions. Other examples of product and trademark franchise systems include
agricultural machinery dealers, soft drink bottlers, and beer distributorships. In a business format
franchise, which is by far the more popular approach to franchising for entrepreneurial firms, the
franchisor provides a formula for doing business to the franchisee along with training,
advertising, and other forms of assistance. Fast-food restaurants and convenience stores are wellknown examples of business format franchises.
72) When is franchising appropriate (from the business owner's point of view)? Provide an
example of when franchising is appropriate and when it is inappropriate.
Answer: Franchising is appropriate when a firm has a strong or a potentially strong trademark, a
well-designed business method, and a desire to grow. An example is Panera Bread. The company
has a strong trademark (in the fast-casual dining segment), a well-designed business method, and
a desire to grow. In some instances, franchising is not appropriate. For example, franchising
would not work for Wal-Mart. While Panera Bread has a large number of franchised outlets,
each individual outlet is relatively small and has a limited menu, and policies and procedures can
be written to cover almost any contingency. In contrast, although Wal-Mart is similar to Burger
King in that it too has a strong trademark and thousands of outlets, Wal-Mart stores are much
larger, more expensive to build, and more complex to run than Panera Bread restaurants. It
would also be nearly impossible for Wal-Mart to find an adequate number of qualified people
who would have the financial capital and expertise to open Wal-Mart stores on their own.
73) What are the primary advantages and disadvantages to establishing a franchise system (from
the franchisor's point of view)?
Answer: There are two primary advantages to franchising. First, early in the life of an
organization, capital is typically scarce, and rapid growth is needed to achieve brand recognition
and economies of scale. Franchising helps an organization grow quickly because franchisees
provide the majority of capital. Second, a management concept called agency theory argues that
for organizations with multiple units, it is more effective for the units to be run by franchisees
than by managers, who run company-owned stores. The theory is that managers, because they
are usually paid a salary, may not be as committed to the success of their individual units as
franchisees, who are in effect the owners of the units they manage. The primary disadvantage of
franchising is that an organization allows others to profit from its trademark and business
method.
74) How can a person tell if franchising is right for them?
Answer: Purchasing a franchise should be weighed against the alternatives of buying an existing
business or launching an entrepreneurial venture from scratch. Answering the following
questions will help determine whether franchising is a good fit for people thinking about starting
their own business.
∙ Are you willing to take orders?
∙ Are you willing to be part of a franchise "system?"
∙ How will you react if you make a suggestion to your franchisor and your suggestion is rejected?
∙ What are you looking for in a business? How hard do you want to work?
∙ How willing are you to put your money at risk to "buy-into" someone else's system?
75) List and explain three of the common misconceptions about franchising.
Answer:
∙ Franchising is a safe investment. Franchising, in and of itself, is no safer an investment than any
other form of business ownership.
∙ A strong industry ensures franchise success. While it is generally important to operate in a
growing industry, the strength of an industry does not make up for a poor product, a poor
business system, poor management, or inappropriate advertising. There are many firms that fail
in growing industries just as there are firms that succeed in unattractive ones.
∙ I can operate my franchise outlet for less than the franchisor predicts. The operation of a
franchise outlet usually costs just as much as the franchisor predicts.
Other possible answers are included under the heading "Watch Out! Common Misconceptions
about Franchising" in Chapter 15 in the textbook.
Test Bank for Entrepreneurship: Successfully Launching New Ventures
Bruce R. Barringer, R. Duane Ireland
9780132555524, 9780131393905, 9780134729534, 9780133797190
