Entrepreneurship: Successfully Launching New Ventures, 6e, GE (Barringer/Ireland)
Chapter 15 Franchising
1) Uptown Cheapskate, the company profiled in the opening feature of Chapter 15, was started
by Chelsea and Scott Sloan. According to the feature, Chelsea and Scott decided to grow
Uptown Cheapskate via franchising because they wanted to ________.
A) grow quickly without making a huge investment in real estate
B) capture the prestige of being a franchise organization
C) maintain maximum control of their business while at the same time maximizing profits
D) grow quickly while at the same time maintaining maximum control of their business
E) grow slowly while at the same time maximizing profits
Answer: A
Diff: 2
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Reflective Thinking
Quest. Category: Critical Thinking
2) Which of the following statements is incorrect regarding franchising?
A) In some industries, such as automotive and retail food, franchising is a dominant form of
business ownership and growth.
B) There are some instances in which franchising is not appropriate.
C) Franchising is a relatively new form of business organization.
D) Franchising, by its very nature, involves the sharing of knowledge between a franchisor and a
franchisee.
E) Franchising is a relatively poorly understood form of business ownership and growth.
Answer: C
Diff: 2
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Application of Knowledge
Quest. Category: Application
3) ________ 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) Franchising
E) Sub-Contracting
Answer: D
Diff: 1
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Analytical Thinking
Quest. Category: Analytical
1
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4) 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
Diff: 2
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Analytical Thinking
Quest. Category: Critical Thinking
5) According to the textbook, the Comfort Keepers business idea lends itself to franchising
because the ________.
A) company has the ability to grow profitably and has a good trademark
B) company's business concept is easy to teach and individual Comfort Keeper outlets are
inexpensive to open and operate
C) company has new technology to introduce to the marketplace
D) company has intellectual property and the ability to grow quickly
E) company has a good trademark and a good business method
Answer: E
Diff: 3
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Reflective Thinking
Quest. Category: Critical Thinking
6) The two distinctly different types of franchise systems are ________ franchise and ________
franchise.
A) product trademark; business arrangement
B) product plus; business format
C) business design; product improvement
D) product extension; business design
E) product trademark; business format
Answer: E
Diff: 2
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Application of Knowledge
Quest. Category: Application
2
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7) 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
Diff: 2
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Analytical Thinking
Quest. Category: Analytical
8) General Motors operates a ________ franchise system.
A) product format and trademark
B) product extension
C) product and trademark
D) business format
E) business format and trademark
Answer: C
Diff: 2
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Reflective Thinking
Quest. Category: Critical Thinking
9) James Ryan has been a Coors Beer distributor for the past 20 years. James owns a ________
franchise.
A) business format
B) product and trademark
C) business design
D) product plus
E) product and business format
Answer: B
Diff: 2
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Reflective Thinking
Quest. Category: Critical Thinking
3
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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) Ford Motors establishes product trademark rather than business format franchises.
C) Product trademark franchises are 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
Diff: 3
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Application of Knowledge
Quest. Category: Application
11) Melanie Jacobs recently opened a Papa John's franchise. So far, she is very satisfied with
Papa John's because in exchange for an initial franchise fee and an ongoing royalty payment,
Papa John's has provided Melanie a formula for doing business along with training, advertising,
and other forms of assistance. Melanie purchased a ________ franchise.
A) business extension
B) formula driven
C) sales extension
D) product and trademark
E) business format
Answer: E
Diff: 2
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Reflective Thinking
Quest. Category: Critical Thinking
12) Which of the following statements is correct regarding business format franchises?
A) Business format franchises are less popular than product and trademark franchises.
B) A business format franchise can be very rigid and demanding.
C) Agricultural machinery dealerships and soft-drink bottlers are well-known examples of
business format franchises.
D) Business format franchises are illegal in some states.
E) The business format franchisor obtains the majority of its income from selling its products to
its dealers at a markup.
Answer: B
Diff: 3
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Analytical Thinking
Quest. Category: Analytical
4
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13) Which of the following is NOT an industry in which business format franchises
predominate?
A) Soft drink bottlers
B) Business services
C) Hotels and motels
D) Quick service restaurants
E) Automotive service and repair
Answer: A
Diff: 1
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Application of Knowledge
Quest. Category: Application
14) A(n) ________ franchise agreement involves the sale of a single franchise for a specific
location.
A) individual
B) one-of-a-kind
C) sole
D) defined
E) general
Answer: A
Diff: 1
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Analytical Thinking
Quest. Category: Analytical
15) Jenna Page recently entered into an agreement with Anytime Fitness to open five Anytime
Fitness franchises. According to the agreement that Jenna entered into, she has the right to open
up to five Anytime Fitness franchises within the city limits of Lawrence, Kansas. Jenna has
entered into a(n) ________ franchise agreement.
A) individual
B) district
C) locality
D) area
E) city
Answer: D
Diff: 2
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Reflective Thinking
Quest. Category: Critical Thinking
5
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16) 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
Diff: 3
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Analytical Thinking
Quest. Category: Analytical
17) The people who buy franchises from master franchises are typically called ________
franchisees.
A) minor
B) secondary
C) mini
D) subordinate
E) sub
Answer: E
Diff: 2
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Application of Knowledge
Quest. Category: Application
18) A multiple-unit franchisee is a person who owns ________.
A) franchise outlets from more than one franchisor
B) both product and trademark franchise outlets and business format franchise outlets
C) and operates more than one outlet of the same franchisor
D) more than 10 franchise outlets
E) franchise units from multiple franchisors
Answer: C
Diff: 2
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Analytical Thinking
Quest. Category: Analytical
19) 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
Diff: 1
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Application of Knowledge
Quest. Category: Application
6
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20) A product and trademark franchise typically connects a single manufacturer with a network
of dealers or distributors.
Answer: TRUE
Diff: 2
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Analytical Thinking
Quest. Category: Analytical
21) A Pepsi Cola bottling dealership is an example of a business format franchise.
Answer: FALSE
Diff: 2
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Analytical Thinking
Quest. Category: Analytical
22) 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
Diff: 2
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Reflective Thinking
Quest. Category: Critical Thinking
23) Business format franchises typically allow franchisees substantial flexibility in how they run
their individual franchise units.
Answer: FALSE
Diff: 2
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Reflective Thinking
Quest. Category: Critical Thinking
24) An area franchise agreement allows a franchisee to own and operate a specific number of
outlets in a particular geographic area.
Answer: TRUE
Diff: 2
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Reflective Thinking
Quest. Category: Critical Thinking
25) The people who buy franchises from master franchisees are typically called employeefranchisees.
Answer: FALSE
Diff: 2
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Analytical Thinking
Quest. Category: Analytical
7
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26) 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.
Diff: 2
LO: 15.1: Explain franchising and how this form of business ownership works.
AACSB: Analytical Thinking
Quest. Category: Analytical
27) From the franchisor's point of view, which of the following is incorrect regarding
franchising?
A) Establishing a franchise system should be approached carefully and deliberately.
B) Franchising is a relatively simple business endeavor.
C) Franchising involves managerially demanding tasks.
D) Over the years a number of fraudulent franchise organizations have come and gone.
E) Franchising is a fairly heavily regulated form of business ownership.
Answer: B
Diff: 3
LO: 15.2: Describe steps entrepreneurs can take to establish a franchise system.
AACSB: Application of Knowledge
Quest. Category: Application
28) 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) firm has a strong trademark, a desire to grow, and a well-designed business method
C) firm is trying to commercialize a technology product, it is well-funded, and it has a desire to
grow
D) firm has a weak trademark, it is well-funded, and it has a desire to grow
E) firm has a desire to grow, it has a well-designed business method, and it is well funded
Answer: B
Diff: 2
LO: 15.2: Describe steps entrepreneurs can take to establish a franchise system.
AACSB: Analytical Thinking
Quest. Category: Analytical
8
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29) Which of the following companies is suitable for franchising?
A) Home Depot
B) Dropbox
C) Qdoba Mexican Grill
D) Walmart
E) GoPro
Answer: C
Diff: 2
LO: 15.2: Describe steps entrepreneurs can take to establish a franchise system.
AACSB: Analytical Thinking
Quest. Category: Analytical
30) 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 the things the founders of Wahoo's did that has contributed to its
success is elect to make Wahoo's ________.
A) a relatively slow growth system, focusing on branding and service quality rather than rapid
growth
B) a nationwide system, operating in all 50 states
C) 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) a niche franchise that is only available in theme parks and food courts of malls
E) a fast growth system to establish a clear first-mover advantage in its niche
Answer: A
Diff: 2
LO: 15.2: Describe steps entrepreneurs can take to establish a franchise system.
AACSB: Reflective Thinking
Quest. Category: Critical Thinking
31) 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
Diff: 2
LO: 15.2: Describe steps entrepreneurs can take to establish a franchise system.
AACSB: Interpersonal Relations and Teamwork
Quest. Category: Critical Thinking
9
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32) Franchising is a popular form of business growth.
Answer: TRUE
Diff: 1
LO: 15.2: Describe steps entrepreneurs can take to establish a franchise system.
AACSB: Application of Knowledge
Quest. Category: Application
33) Home Depot is an example of an organization that is perfectly suited for franchising.
Answer: FALSE
Diff: 2
LO: 15.2: Describe steps entrepreneurs can take to establish a franchise system.
AACSB: Reflective Thinking
Quest. Category: Critical Thinking
34) An individual who is team oriented and has experience in the industry in which the franchise
competes is a good candidate to be a franchisee.
Answer: TRUE
Diff: 2
LO: 15.2: Describe steps entrepreneurs can take to establish a franchise system.
AACSB: Reflective Thinking
Quest. Category: Critical Thinking
35) 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.
Diff: 2
LO: 15.2: Describe steps entrepreneurs can take to establish a franchise system.
AACSB: Analytical Thinking
Quest. Category: Analytical
10
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36) 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) incentive
B) stimulus
C) agency
D) stewardship
E) motivation
Answer: C
Diff: 1
LO: 15.3: Become familiar with the advantages and disadvantages of establishing a franchise
system.
AACSB: Analytical Thinking
Quest. Category: Analytical
37) According to the textbook, from the franchisor's point of view, the primary disadvantage of
franchising is that ________.
A) it is a poorly understood form of business ownership
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) it is not legal in seven states and the District of Columbia
Answer: B
Diff: 3
LO: 15.3: Become familiar with the advantages and disadvantages of establishing a franchise
system.
AACSB: Analytical Thinking
Quest. Category: Analytical
38) Which of the following is a company that is suitable for franchising but has a relatively small
number of franchise outlets?
A) Anytime Fitness
B) Hampton Inn Hotels
C) McDonalds
D) Starbucks
E) The UPS Store
Answer: D
Diff: 3
LO: 15.3: Become familiar with the advantages and disadvantages of establishing a franchise
system.
AACSB: Application of Knowledge
Quest. Category: Application
11
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39) 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
Diff: 2
LO: 15.3: Become familiar with the advantages and disadvantages of establishing a franchise
system.
AACSB: Application of Knowledge
Quest. Category: Application
40) An advantage of franchising, from the franchisors point of view, is that franchising helps a
venture grow because the franchisees provide the majority of the capital.
Answer: TRUE
Diff: 2
LO: 15.3: Become familiar with the advantages and disadvantages of establishing a franchise
system.
AACSB: Reflective Thinking
Quest. Category: Critical Thinking
41) A management concept called agency theory refutes the value of franchising for
organizations with multiple units, like restaurant chains.
Answer: FALSE
Diff: 2
LO: 15.3: Become familiar with the advantages and disadvantages of establishing a franchise
system.
AACSB: Analytical Thinking
Quest. Category: Analytical
12
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42) 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.
Diff: 2
LO: 15.3: Become familiar with the advantages and disadvantages of establishing a franchise
system.
AACSB: Application of Knowledge
Quest. Category: Application
43) The What Went Wrong feature in Chapter 15 focuses on Sbarro's, the pizza chain. One of the
main reasons for Sbarro's failure was the ________.
A) decline in mall traffic
B) high prices of products
C) poor quality of products
D) dispute with franchisees
E) high number of franchises
Answer: A
Diff: 3
LO: 15.4: Describe actions and issues associated with a decision to buy a franchise.
AACSB: Reflective Thinking
Quest. Category: Critical Thinking
44) According to the textbook, which of the following is NOT a cost that is typically associated
with buying a franchise?
A) Advertising fees
B) Continuing royalty payments
C) Trademark acquisition fee
D) Initial franchise fee
E) Capital requirements
Answer: C
Diff: 2
LO: 15.4: Describe actions and issues associated with a decision to buy a franchise.
AACSB: Application of Knowledge
Quest. Category: Critical Thinking
13
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45) According to the textbook, a franchisee's weekly or monthly royalty fees are typically around
________ percent of gross income.
A) 2
B) 3
C) 4
D) 5
E) 6
Answer: D
Diff: 3
LO: 15.4: Describe actions and issues associated with a decision to buy a franchise.
AACSB: Application of Knowledge
Quest. Category: Application
46) 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
Diff: 2
LO: 15.4: Describe actions and issues associated with a decision to buy a franchise.
AACSB: Analytical Thinking
Quest. Category: Analytical
47) Advertising fees that franchisees have to pay the franchisor are typically less than ________
percent of gross income.
A) 1
B) 2
C) 3
D) 4
E) 5
Answer: C
Diff: 2
LO: 15.4: Describe actions and issues associated with a decision to buy a franchise.
AACSB: Reflective Thinking
Quest. Category: Critical Thinking
14
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48) There are two primary advantages to buying a franchise over other forms of business
ownership. First, the franchisor typically provides training, technical expertise, and other forms
of support, 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 provides an entrepreneur the ability to own a business using a tested and
refined business method
E) franchise organizations are consistently more profitable than non-franchise organizations in
the same industry
Answer: D
Diff: 3
LO: 15.4: Describe actions and issues associated with a decision to buy a franchise.
AACSB: Application of Knowledge
Quest. Category: Application
49) 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
Diff: 2
LO: 15.4: Describe actions and issues associated with a decision to buy a franchise.
AACSB: Analytical Thinking
Quest. Category: Analytical
50) 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
Diff: 2
LO: 15.4: Describe actions and issues associated with a decision to buy a franchise.
AACSB: Application of Knowledge
Quest. Category: Application
15
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51) All of the following are advantages to buying a franchise except ________.
A) restrictions on creativity
B) potential for business growth
C) availability of financing
D) a proven product or service within an established market
E) franchisor's ongoing support
Answer: A
Diff: 2
LO: 15.4: Describe actions and issues associated with a decision to buy a franchise.
AACSB: Analytical Thinking
Quest. Category: Analytical
52) In the majority of cases, a franchisee pays a royalty based on a percentage of weekly or
monthly net income.
Answer: FALSE
Diff: 3
LO: 15.4: Describe actions and issues associated with a decision to buy a franchise.
AACSB: Application of Knowledge
Quest. Category: Application
53) 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
Diff: 2
LO: 15.4: Describe actions and issues associated with a decision to buy a franchise.
AACSB: Analytical Thinking
Quest. Category: Analytical
54) The royalty fees a franchisee pays are usually around four to five percent of gross income.
Answer: TRUE
Diff: 2
LO: 15.4: Describe actions and issues associated with a decision to buy a franchise.
AACSB: Reflective Thinking
Quest. Category: Critical Thinking
55) 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
Diff: 2
LO: 15.4: Describe actions and issues associated with a decision to buy a franchise.
AACSB: Reflective Thinking
Quest. Category: Critical Thinking
16
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56) 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?
Diff: 2
LO: 15.4: Describe actions and issues associated with a decision to buy a franchise.
AACSB: Reflective Thinking
Quest. Category: Critical Thinking
57) According to the textbook, the first rule of buying a franchise is ________.
A) asking for a copy of the franchisor's annual report
B) checking the profitability of similar franchises
C) making sure the franchisor's industry is conductive to franchising
D) making proper arrangements for financing
E) not making a hasty decision
Answer: E
Diff: 3
LO: 15.5: Explain the steps an entrepreneur goes through to buy a franchise.
AACSB: Analytical Thinking
Quest. Category: Analytical
58) 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.
• The franchisor is a nice person-he'll help me out if I need it. Although it may be human
nature to rely on the goodwill of others, don't expect anything from your franchisor that isn't
spelled out in the franchise agreement.
Diff: 3
LO: 15.5: Explain the steps an entrepreneur goes through to buy a franchise.
AACSB: Application of Knowledge
Quest. Category: Application
17
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59) To avoid making a hasty judgment, a franchisee may not purchase a franchise for ________
days from the time the Franchise Disclosure Document is received.
A) 3
B) 5
C) 10
D) 14
E) 30
Answer: D
Diff: 3
LO: 15.6: Identify and explain the various legal aspects associated with the franchise
relationship.
AACSB: Application of Knowledge
Quest. Category: Application
60) The ________ contains 23 categories of information that give a prospective franchisee a
broad base of information about the background and financial health of the franchisor.
A) Franchise Due Diligence Certificate
B) Franchise Offering Contract
C) Standardized Franchise Contract
D) Franchise Disclosure Document
E) Franchise Code of Conduct
Answer: D
Diff: 2
LO: 15.6: Identify and explain the various legal aspects associated with the franchise
relationship.
AACSB: Application of Knowledge
Quest. Category: Application
61) 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
Diff: 2
LO: 15.6: Identify and explain the various legal aspects associated with the franchise
relationship.
AACSB: Application of Knowledge
Quest. Category: Application
18
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62) The Franchise Disclosure Document contains ________ categories of information.
A) 8
B) 14
C) 23
D) 35
E) 44
Answer: C
Diff: 2
LO: 15.6: Identify and explain the various legal aspects associated with the franchise
relationship.
AACSB: Application of Knowledge
Quest. Category: Application
63) 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 contract
E) franchise circular
Answer: B
Diff: 2
LO: 15.6: Identify and explain the various legal aspects associated with the franchise
relationship.
AACSB: Application of Knowledge
Quest. Category: Application
64) While franchise agreements vary, each agreement typically contains these sections: the
________ agreement and the ________ agreement.
A) statutory; purchase
B) franchise; buy
C) buy; membership
D) procurement; statutory
E) purchase; franchise
Answer: E
Diff: 2
LO: 15.6: Identify and explain the various legal aspects associated with the franchise
relationship.
AACSB: Application of Knowledge
Quest. Category: Application
19
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65) While franchise agreements vary, each agreement typically contains the purchase agreement
and the ________ agreement.
A) legal
B) procurement
C) conversion
D) sell
E) franchise
Answer: E
Diff: 2
LO: 15.6: Identify and explain the various legal aspects associated with the franchise
relationship.
AACSB: Application of Knowledge
Quest. Category: Application
66) 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
Diff: 3
LO: 15.6: Identify and explain the various legal aspects associated with the franchise
relationship.
AACSB: Application of Knowledge
Quest. Category: Application
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
Diff: 2
LO: 15.6: Identify and explain the various legal aspects associated with the franchise
relationship.
AACSB: Application of Knowledge
Quest. Category: Application
68) A prospective franchisee should fully understand all the information contained in the
Franchise Disclosure Document before a franchise agreement is signed.
Answer: TRUE
Diff: 2
LO: 15.6: Identify and explain the various legal aspects associated with the franchise
relationship.
AACSB: Application of Knowledge
Quest. Category: Application
20
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69) The Franchise Disclosure Document is the document that consummates the sale of a
franchise.
Answer: FALSE
Diff: 2
LO: 15.6: Identify and explain the various legal aspects associated with the franchise
relationship.
AACSB: Application of Knowledge
Quest. Category: Application
70) According to a recent FTC report, instances of problems between franchisors and their
franchisees tend to be ________.
A) prevalent practices
B) isolated occurrences
C) nonexistent
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
Diff: 2
LO: 15.7: Discuss two additional issues–franchise ethics and international franchising–
entrepreneurs should think about when considering franchising.
AACSB: Ethical Understanding and Reasoning
Quest. Category: Critical Thinking
71) 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
Diff: 2
LO: 15.7: Discuss two additional issues–franchise ethics and international franchising–
entrepreneurs should think about when considering franchising.
AACSB: Reflective Thinking
Quest. Category: Critical Thinking
21
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72) In regard to international franchising, under a(n) ________ franchise agreement, 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
B) global
C) concurrent
D) direct
E) express
Answer: D
Diff: 2
LO: 15.7: Discuss two additional issues–franchise ethics and international franchising–
entrepreneurs should think about when considering franchising.
AACSB: Application of Knowledge
Quest. Category: Application
73) Jim Pierce just purchased the rights to develop multiple School of Rock franchises in
Germany. Jim just purchased a(n) ________ franchise arrangement.
A) concurrent
B) indirect
C) lateral
D) direct
E) subordinate
Answer: D
Diff: 2
LO: 15.7: Discuss two additional issues–franchise ethics and international franchising–
entrepreneurs should think about when considering franchising.
AACSB: Application of Knowledge
Quest. Category: Application
74) 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
Diff: 2
LO: 15.7: Discuss two additional issues–franchise ethics and international franchising–
entrepreneurs should think about when considering franchising.
AACSB: Application of Knowledge
Quest. Category: Application
22
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75) The majority of franchisors are highly ethical individuals who are interested only in making
a fair return on their investment.
Answer: TRUE
Diff: 1
LO: 15.7: Discuss two additional issues–franchise ethics and international franchising–
entrepreneurs should think about when considering franchising.
AACSB: Ethical Understanding and Reasoning
Quest. Category: Critical Thinking
23
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