chapter 15

Entrepreneurship: Successfully Launching New Ventures, 4e (Barringer/Ireland)

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

Diff: 3 Page Ref: 495

Topic: What Is Franchising, and How Does It Work?

AACSB: Reflective Thinking

Objective: Discuss growth strategies, including franchising

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





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





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 business in exchange for an initial franchise fee and an ongoing royalty.

A) Licensing

B) Joint Venturing

C) Contracting

D) Subcontracting

E) Franchising

Answer: E





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





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





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





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





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





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





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





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





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





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





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





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





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





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


Topic: Establishing a Franchise System



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





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





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





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





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 makes 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 makes most of the money

Answer: B





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





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





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





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


Topic: Buying a Franchise



28) Which of the following statement 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





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





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





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





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





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





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





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





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





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


Topic: Legal Aspects of the Franchise Relationship



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





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





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





41) The FDD contains ________ categories of information.

A) 5

B) 15

C) 23

D) 33

E) 41

Answer: C





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





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





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





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





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


Topic: More About Franchising



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





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





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





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





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





52) A business format franchise typically connects a single manufacturer with a network of dealers or distributors.

Answer: FALSE





53) The business format franchise is a more popular approach to franchising than the product and trademark franchise.

Answer: TRUE





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





55) Business format franchises typically allow franchisees substantial flexibility in how they run their individual franchise units.

Answer: FALSE





56) An area franchise agreement allows a franchisee to own and operate a specific number of outlets in a particular geographic area.

Answer: TRUE





57) The people who buy franchises from master franchisees are typically called employee-franchisees.

Answer: FALSE





58) Despite its advantages, franchising is not a popular form of business growth.

Answer: FALSE





59) Target is an example of an organization that is perfectly suited for franchising, but it doesn't franchise.

Answer: FALSE





60) An individual who is team oriented is typically a good candidate to be a franchisee.

Answer: TRUE





61) The primary disadvantage of franchising is that an organization allows others to profit from its trademark and business method.

Answer: TRUE





62) A management concept called agency theory refutes the value of franchising for organizations with multiple units, like restaurant chains.

Answer: FALSE





63) In the majority of cases, a franchisee pays a royalty based on a percentage of weekly or monthly net income.

Answer: FALSE





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





65) The royalty fees a franchisee pays are usually around 10 percent of gross income.

Answer: FALSE





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





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





68) Franchisors are required by law to disclose all their costs in a document called the Franchise Disclosure Document.

Answer: TRUE





69) The franchise agreement, or contract, is the document that consummates the sale of a franchise.

Answer: TRUE





70) The majority of franchisors are highly ethical individuals who are interested only in making a fair return on their investment.

Answer: TRUE





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 well-known 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.





23Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

chapter 15

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