ENTRE Study Guide, Chapter 7
True/False
Indicate whether the statement is true or false.
____
1. If you are buying an existing business, you should ask the current owner for important information in written
form.
____
2. Fewer than 70,000 people in the United States own franchises, and the popularity of franchise ownership is
declining rapidly.
____
3. Initial franchise fees are usually refundable if the franchise owner later decides to go into another line of
business.
____
4. The Federal Trade Commission requires franchise sellers to give potential buyers a detailed disclosure
document at least ten business days before paying any money or legally committing to a purchase.
____
5. Not all franchisors help buyers with marketing, merchandising, and site selection.
____
6. According to some estimates, as many as 90 percent of all businesses, including the vast majority of smalland medium-sized companies, are owned by families.
____
7. It is generally easier to start a new business than to take over an existing business or purchase a franchise.
____
8. Income earned by a corporation is taxed twice: once as corporate income and again as individual income.
____
9. Antitrust laws make monopolies in certain industries illegal; they also ban other types of business activities
that do not promote competition.
____ 10. The Federal Bureau of Investigation is the government agency that monitors activities such as false or
misleading advertising and price setting by competitors.
____ 11. Intellectual property is the original, creative work of an artist or inventor and may include such things as
songs, novels, artistic designs, and inventions.
____ 12. The copyright on a book remains in effect until the author dies.
____ 13. The Consumer Product Safety Act of 1972 requires all banks to calculate credit costs in the same way.
____ 14. A legally binding agreement between two or more persons or parties is called a license.
____ 15. Entrepreneurs should be able to handle minor legal matters themselves.
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____ 16. Which of the following is not an advantage of buying an existing business?
a. There are prior records of revenues, expenses, and profits, making financial planning
easier.
b. Capital is not required for a new business since it already exists.
c. The seller may be willing to train the new owner.
d. Financial arrangements can be easier.
____ 17. If you are considering buying an existing business, ask the current owner to provide you with a complete
financial accounting of operations for at least
a. the past six months.
c. the past three years.
____ 18.
____ 19.
____ 20.
____ 21.
____ 22.
____ 23.
____ 24.
____ 25.
b. the past year.
d. the past ten years
Weekly or monthly payments made by the local owner to the franchise company are called
a. royalty fees.
c. startup costs.
b. initial franchise fees.
d. advertising fees.
A franchisee
a. can never have his/her franchise agreement terminated once it is signed.
b. has more freedom to make decisions than other entrepreneurs.
c. can typically plan on paying more for equipment and supplies than other entrepreneurs.
d. is dependent on the performance of other franchisees in the chain.
A business owned exclusively by one person is called a
a. sole proprietorship.
c. retailer.
b. partnership.
d. corporation.
A unit of ownership in a corporation is called a
a. dividend.
c. certificate of deposit.
b. share of stock.
d. bond.
A corporation’s board of directors is responsible for all of the following except
a. electing the corporation’s officers.
b. determining the salaries of company executives.
c. the day-to-day management of the corporation.
d. setting the corporation’s rules for conducting business.
The main reason entrepreneurs set up corporations is because
a. they are the easiest and least-expensive form of business ownership.
b. they are much more prestigious than other forms of ownership.
c. it is easier to raise money as a corporation than as a partnership or sole proprietorship.
d. the personal assets of shareholders may not be taken to pay the debts of the corporation.
This law protects small businesses from unfair pricing practices.
a. Clayton Act
c. Sherman Act
b. Robinson-Patman Act
d. Wheeler-Lea Act
Local governments control the types of buildings that can be built in different areas through the use of
a. trademarks.
c. copyrights.
b. licenses.
d. zoning regulations.
Numeric Response
26. Colleen’s franchise earned $56,000 last year. Annual royalty fees are 8 percent. How much did Colleen pay in
royalty fees last year?
27. Willie and Ralph have a partnership agreement stating that Willie will receive 65 percent of the company
profits, and Ralph will receive the remainder. Last year, Willie’s share of the profits totaled $58,500. What
was Ralph’s share?
28. Mark, Jessica, and Benjamin were partners in a business. The division of profits and losses as specified in the
partnership agreement is 70 percent for Mark, 25 percent for Jessica, and 5 percent for Benjamin. The
business went out of business last month, leaving debts of $35,000. What is the dollar amount of Benjamin’s
liability?
29. Burnell organized his gift shop, Exotic Connections, as a corporation. He created 500 shares of stock, each
worth $100. Burnell held 360 of the shares for himself. He sold the rest in equal amounts to seven investors.
How many shares does each investor own?
30. Burnell created 500 shares of stock for his corporation, each worth $100. He held 360 of the shares for
himself and sold the rest in equal amounts to seven investors. How much did each investor pay for his/her
shares?
Completion
Complete each statement.
31. A(n) ____________________ is an expert on determining the value of a business and can help an
entrepreneur determine a price to offer for an existing business.
32. An existing business may have built up a considerable amount of ____________________, or customer
loyalty.
33. A(n) ____________________ is a legal agreement that gives an individual the right to market a company’s
products or services in a particular area.
34. The costs associated with beginning a business, such as renting a facility, equipping the outlet, and purchasing
inventory, are called ____________________ costs.
35. A business owned by two or more people is a(n) ____________________.
36. A(n) ____________________ is a business that has the legal rights of a person but is independent of its
owners.
37. ____________________ are distributions of corporate profits to the shareholders.
38. A(n) ____________________ is the grant of a property right to an inventor to exclude others from making,
using, or selling his or her invention.
39. A(n) ____________________ is a form of intellectual property law that protects original works of authorship,
including literary, dramatic, musical, and artistic works.
40. A(n) ____________________ is a name, symbol, or special mark used to identify a business or brand of
product.
Short Answer
41. Give at least three reasons why a business owner might put his/her business up for sale.
42. What is the difference between a franchisee and a franchisor?
43. What is a shill?
44. Name two important disadvantages of owning a sole proprietorship.
45. What is the purpose of a partnership agreement?
46. What is an S corporation? How does it differ from a regular corporation?
Essay
47. Name and describe the four basic types of fees and costs a franchise owner must pay.
48. Describe the typical advantages and disadvantages of working for a family business.
49. What is the most common form of business ownership in the United States? Why?
50. For a contract to be considered legally binding, certain elements must be included when the contract is
created. Name and briefly describe them.
ENTRE Study Guide, Chapter 7
Answer Section
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MULTIPLE CHOICE
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NUMERIC RESPONSE
26. ANS: $4,480
PTS: 1
27. ANS: $31,500
PTS: 1
28. ANS: $1,750
PTS: 1
29. ANS: 20
PTS: 1
30. ANS: $2,000
PTS: 1
COMPLETION
31. ANS: valuator
PTS: 1
32. ANS: goodwill
PTS: 1
33. ANS: franchise
PTS: 1
34. ANS: startup
PTS: 1
35. ANS: partnership
PTS: 1
36. ANS: corporation
PTS: 1
37. ANS: Dividends
PTS: 1
38. ANS: patent
PTS: 1
39. ANS: copyright
PTS: 1
40. ANS: trademark
PTS: 1
SHORT ANSWER
41. ANS:
Owners sell their businesses for a variety of reasons, including insufficient sales or profits, new competition,
fear of changing economic conditions, retirement, a dispute among partners, death or illness of a partner, or
the owner’s desire to do something different.
PTS: 1
42. ANS:
A franchisee is the person who purchases a franchise agreement. A franchisor is the person or company that
offers a franchise for purchase.
PTS: 1
43. ANS:
A shill is someone listed in a disclosure document for a franchise who is paid to give a favorable report about
the franchise to a potential buyer.
PTS: 1
44. ANS:
It can be difficult to raise money for a sole proprietorship. You are the only person investing money. You also
bear the burden of all of the risks. If a sole proprietorship fails and debts remain, the entrepreneur’s personal
assets may be taken to pay what is owed.
PTS: 1
45. ANS:
The purpose of the partnership agreement is to set down in writing the rights and responsibilities of each of
the owners.
PTS: 1
46. ANS:
A small corporation can elect to be treated as an S corporation. An S corporation is a corporation organized
under Subchapter S of the Internal Revenue Code. Unlike regular corporations, an S corporation is not taxed
as a business. The individual shareholders are taxed on the profits they earn, as they would be in a
partnership.
PTS: 1
ESSAY
47. ANS:
Franchise owners typically pay four basic kinds of fees: an initial franchise fee, startup costs, royalty fees, and
advertising fees. The initial franchise fee is the amount the local franchise owner pays in return for the right to
run the franchise. The fee can run anywhere from a few thousand to a few hundred thousand dollars. It is
usually nonrefundable. Startup costs are the costs associated with beginning a business. They include the
costs of renting a facility, equipping the outlet, and purchasing inventory. Royalty fees are weekly or monthly
payments made by the local owner to the franchise company. These payments usually are a percentage of
your franchise’s income. Advertising fees are paid to the franchise company to support television, magazine,
or other advertising of the franchise as a whole.
PTS: 1
48. ANS:
Entrepreneurs who work for their family businesses enjoy the pride and sense of mission that comes with
being part of a family enterprise. They also enjoy the fact that their businesses remain in the family for at least
one more generation. Some enjoy working with relatives and knowing that their efforts are benefiting others
whom they care about.
However, family businesses have several drawbacks. Family members often hold senior management
positions regardless of their actual abilities, which sometimes results in poor business decisions and can make
it difficult to retain good employees who are not members of the family. Family politics often enter into
business decision making. Also, the distinction between business life and private life is blurred in familyowned businesses. As a result, business problems end up affecting family life as well.
Entrepreneurs who do join their family business must be prepared to make compromises. Unlike individuals
who start or buy their own companies, people who work for their families cannot make all decisions
themselves. They may also be unable to set policies and procedures as they like.
Another challenge for a family-owned business is what to do when there is no family member to take over the
business. This leaves the family with a decision to make regarding continuing the business or selling it to a
non-family member.
PTS: 1
49. ANS:
The sole proprietorship is the most common form of ownership in the United States. The government
exercises very little control over sole proprietorships, so they can be established and run very simply.
Accurate tax records and certain employment laws must be met, but these are usually the only forms of
government regulation for a sole proprietorship. This is why sole proprietorships are so popular.
PTS: 1
50. ANS:
The elements that must be included when a contract is created in order for it to be considered legally binding
are agreement, consideration, capacity, and legality. Agreement occurs when one party offers or agrees to do
something and the other party accepts. Consideration is what is exchanged for the promise. Capacity means
the parties are legally able to enter into a binding agreement. Legality means that a contract cannot have
anything in it that is illegal or that would result in illegal activities.
PTS: 1