Scarb Eesbm6e TB 06

Essentials of Entrepreneurship & Small Business Management, 6e (Scarborough)
Chapter 6 Franchising and the Entrepreneur
1) A franchise is a system of distribution in which semi-independent business owners pay

________ and ________ to a parent company in return for the right to become identified with its
trademark, to sell its product or services, and often to use its business format and system.
A) a percentage of sales; royalties
B) upfront costs; incremental costs
C) royalties; monthly consulting charges
D) fees; royalties
Answer: D
Diff: 2 Page Ref: 160
AACSB: Analytic Skills
2) Franchises sales represent ________ percent of the United States' gross domestic product.
A) 1.4
B) 2.4
C) 4.4
D) 6.4
Answer: C
3) ________ franchising involves providing the franchisee with a complete business system,
with an established name, the building layout and design, accounting systems, and other
elements while ________ franchising allows the franchisee to use the franchiser's trade name
without distributing the products exclusively under the franchiser's name.
A) Product distribution; trade name
B) Trade name; pure
C) Pure; trade name
D) Pure; product distribution
Answer: C
4) McDonald's is an example of a ________ franchise.

A) conversion forms
B) trade name
C) product distribution
D) pure
Answer: D
AACSB: Reflective Thinking
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Copyright © 2011 Pearson Education, Inc.
5) Benefits of involvement in a franchise experience include:
A) management training and support.
B) brand name appeal and standardization of goods and services.
C) national advertising exposure and financial assistance.
D) All of the above
Answer: D
Diff: 1 Page Ref: 162-163
6) Which of the following is not a potential advantage of franchising for the franchisee?
A) Management training and assistance
B) National advertising program
C) Centralized buying power
D) Limited product line
Answer: D
7) Franchisers generally do which of the following regarding financial assistance to franchisees?

A) Provide direct financing.
B) Assist in finding financing and occasionally provide direct assistance in a specific area.
C) Waive royalty fees for franchisees not making an adequate profit.
D) Franchisers provide no assistance because having or finding financing is a requirement for
qualifying for a franchise.
Answer: B
8) A significant advantage a franchisee has over an independent business is the participation in

the franchisor's ________ largely due to the ________ the franchise offers.
A) centralized buying power: buying insight
B) centralized buying power; brand protection
C) centralized buying power: economies of scale
D) economies of scale: territorial protection
Answer: C
9) Some franchisors offer ________ to give existing franchisees the right to exclusive
distribution of brand name goods or services within a particular geographic area.
A) territorial protection
B) exclusive rights
C) guaranteed protection
D) exclusivity
Answer: A
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10) The failure rate for franchises is:
A) higher than the average rate for new businesses.
B) no different from the rate for new businesses.
C) lower than the average rate for new businesses.
D) indeterminable because of the Right to Privacy Act.
Answer: C
11) A recent study reports that the success rate of franchisees increases when a franchise system:
A) requires franchisees to have prior industry experience.
B) requires franchisees to actively manage their operations.
C) has built a strong brand name with training programs to improve knowledge and skills.
D) All of the above increase the rate of success.
Answer: D
12) Franchise royalty fees typically range from ________ to ________ percent of a franchisee's
continuing sales.
A) 1; 3
B) 5; 9
C) 3; 7
D) 7; 12
Answer: C
13) When it comes to purchasing products, equipment, and incurring other expenses, the
franchiser:
A) cannot require the franchisees to buy from the franchise company.
B) can set prices franchisees pay for the products but cannot set the retail price the franchisees
charge.
C) is permitted to set the retail price for the franchisee.
D) cannot require franchisees to buy from an "approved" supplier.
Answer: B
14) Which of the following is not a potential disadvantage of a franchise?

A) Unsatisfactory training program
B) Limited product line
C) Less freedom
D) All of the above are potential disadvantages of a franchise.
Answer: D
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15) A franchise myth is that:

A) once the franchise is open, the franchisee has autonomy to run the business in what ever way
he or she sees fit.
B) the owner need to be hands on.
C) the franchise will only expect to be paid when the franchisee is profitable.
D) franchises fail at a rate higher that independently owned businesses.
Answer: A
16) Which of the following is an indication of a dishonest franchiser?

A) A high-pressure sale
B) A "get-rich-quick" scheme
C) Attempts to discourage you from getting an attorney to review the contract
D) All of the above
Answer: D
17) The FTC's philosophy regarding the Franchise Disclosure Document (FDD) focuses on:
A) catching and prosecuting abusers of franchise laws.
B) verifying the accuracy of FDD information.
C) providing information to prospective franchisees and helping them make wise decisions.
D) licensing prospective franchisers.
Answer: C
18) Which of the following should make a potential franchisee suspicious about a franchiser's
honesty?
A) Claims that the franchise contract is a standard agreement and that there is no need to read it
or have an attorney look it over
B) An offer of direct financing of a specific element of the franchise package
C) Not providing detailed operational information until 10 days before signing the contract
D) Requiring franchisees to spend a certain percentage of profits on advertising
Answer: A
19) In addition to reading the franchiser's FDD, it would be wise for the potential franchisee to
seek a franchise that offers which of the following?
A) A unique concept or marketing approach
B) A registered trademark
C) A positive relationship with franchisees
D) All of the above
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Answer: D
20) Franchises have experienced three major growth waves since its beginning that include a
focus on:
A) rapid growth, the fast food, and specific market niches.
B) stable growth, the service sector, and the food industry.
C) rapid growth, the service sector, and specific market niches.
D) predictable growth, the service sector, and specific market niches.
Answer: C
21) A study by the International Franchises Association reports that minorities own more than
________ percent of all franchises and women own ________ percent of franchises.
A) 2;8
B) 9;20
C) 12.;25
D) 19;25
Answer: D
AACSB: Multicultural & Diversity
22) ________ is an emerging international market for U.S. franchisers that is expected to realize
the highest future growth rate.
A) Europe
B) Canada
C) Japan
D) China
Answer: D
23) One of the major trends in franchising is the ________ of American franchise systems.
A) replication
B) conversion
C) internationalization
D) reduction
Answer: C
24) In a ________ , a franchisee opens more than one unit in a broad territory within a specific
time period.
A) multiple-unit franchising
B) master franchise
C) conversion franchising
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D) piggyback franchising
Answer: A
25) A method of franchising that gives the right to create a semi-independent organization in a
particular territory is a:
A) piggyback franchise.
B) master franchise.
C) product distribution franchise.
D) conversion franchise.
Answer: B
26) When the franchiser has the right to establish a semi-independent organization in a particular
territory to recruit, sell, and support other franchises, it is known as a ________ franchise.
A) multi-unit
B) piggyback
C) conversion
D) master
Answer: D
27) McDonald's recently set up several small franchises in nontraditional locations such as a
hospital, a college campus, an airport, a subway station, and a sports arena. These locations are
based on the principle of:
A) conversion franchising.
B) intercept marketing.
C) multi-unit franchising.
D) piggyback franchising.
Answer: B
28) Chris Jaffe, the owner of a small independent doughnut shop, is worried that a large
doughnut franchise will open an outlet near her location and take away business. Taking a
proactive approach, Jaffe contacts the franchise, and after a few months of negotiations, becomes
a franchisee. Jaffe is an example of which trend in franchising?
A) Piggyback
B) Conversion
C) Master
D) Subfranchising
Answer: B
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29) Establishing a Baskin-Robbins franchise inside a Blimpee's franchise is an example of
________ franchising.
A) multi-unit
B) master
C) piggyback
D) diversionary
Answer: C
30) A franchise is an arrangement in which semi-independent business owners pay fees and
royalties to a parent company in return for the right to sell its products or services and often to
use its business format and system.
Answer: TRUE
31) Pure franchising involves the right to use all the elements of a fully integrated business
operation.
Answer: TRUE
32) Trade name franchising is a system of franchising in which a franchisee purchases the right
to use the franchisor's trade name without distributing particular products under that name.
Answer: TRUE
33) Pure franchising involves a system of franchising in which a franchisor sells a franchisee a
complete business format and system.
Answer: TRUE
34) Before entering a franchise contract, a potential investor should ask, "What can a franchise
do for me that I cannot do for myself?"
Answer: TRUE
35) When a franchisee buys a franchise, he or she is purchasing the expertise and the business of
the franchiser.
Answer: TRUE
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36) Quality is so important in franchising that most franchisers retain the right to terminate the
franchise contract and to repurchase the outlet if a franchisee fails to maintain quality standards.
Answer: TRUE
37) A major advantage of a franchise contract is the national advertising campaign that most
franchisers provide free of charge for their franchisees.
Answer: FALSE
38) Examples of some benefits franchise systems offer include management training, brand
appeal, standardization of goods and services, national advertising, proven business formats,
centralized buying power, and site selection assistance.
Answer: TRUE
39) Most franchisers provide extensive financial help such as loans and low-rate financing for
their franchises.
Answer: FALSE
40) The failure rate for franchises is below that for other types of new businesses.
Answer: TRUE
41) In addition to other fees, franchisees must also pay royalties but only on net profits; in other
words, no profits, and no royalties.
Answer: FALSE
42) It is illegal for a franchiser to require franchisees to purchase products only from "approved
suppliers."
Answer: FALSE
43) Having an attorney review and evaluate a franchise contract is unnecessary since the FTC
requires all franchisers to offer a "standard" franchise contract.
Answer: FALSE
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44) The franchise contract defines the rights and the obligations of both parties and sets the
guidelines that govern the franchise relationship.
Answer: TRUE
45) Franchisees in fast-growing systems reap the benefits of the franchisor's expanding reach,
but they also may encounter the downside of a franchisor's aggressive growth strategy; market
saturation.
Answer: TRUE
46) By signing the franchise contract, a franchisee typically surrenders some freedom and
autonomy in operating his or her business.
Answer: TRUE
47) The bigger the franchise, the more successful the franchisees will be.
Answer: FALSE
Diff: 2 Page Ref: 170, Table 6.1
48) Absentee franchise owners are consistently successful.

Answer: FALSE
49) The Franchise Disclosure Document (FDD) is a document that every franchiser is required
by law to give prospective franchisees before any offer or sale of a franchise.
Answer: TRUE
50) If a franchiser encourages you to sign without reading the agreement, or discourages you
from "spending the money on an attorney," this is a warning sign that the franchiser might be
dishonest.
Answer: TRUE
51) The franchisee turnover rate is the rate at which franchisees leave a franchise system.
Answer: TRUE
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52) A good method for evaluating a franchiser's reputation is to interview existing franchise
owners about the operation.
Answer: TRUE
53) One of the first lessons in franchising is, "Do your homework before you get out your
checkbook."
Answer: TRUE
54) Most franchisees are better educated, more sophisticated, have more business acumen, and
are more financially secure than those of just 20 years ago.
Answer: TRUE
55) A multi-unit franchise gives the franchisee the right to open more than one franchise outlet in
a territory within a specific time frame.
Answer: TRUE
56) A master franchise gives a franchisee the right to create a semi-independent organization in a
particular territory to recruit, sell, and support other franchisees.
Answer: TRUE
57) Define franchising. Explain the three types of franchising. Which is the fastest-growing
segment?
Answer: A system of distribution in which semi-independent business owners (franchisees) pay
fees and royalties to a parent company (franchiser) in return for the right to become identified
with its trademark, to sell its products or services, and often use its business format and system.
The three types of franchising are:
1. Tradename
2. Product distribution
3. Pure (business format)
Pure franchising outlets' sales are growing at a faster rate.

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58) Outline the benefits and drawbacks of buying a franchise.
Answer: Some of the primary benefits of franchising include:
• Management and training support
• Brand name appeal
• Standardized quality of goods and services
• National advertising programs
• Financial assistance
• Proven products and business formats
• Centralized buying power
• Site selection and territorial protection
• Greater chance for success
The drawbacks of franchising include:

• Franchise fees and profit sharing
• Strict adherence to standardized operations
• Restrictions on purchasing
• Limited product line
• Unsatisfactory training programs
• Market saturation
• Less freedom
59) What is the Franchise Disclosure Document? How can this document be of value to a
potential franchisee?
Answer: The law requires franchisers to register and deliver a copy to perspective franchisees
before any offer or sale of a franchise. The Franchise Disclosure Document, or FDD, establishes
full disclosure guidelines for any company selling franchises, outlining 23 important pieces of
information. The FDD can help potential franchisees avoid being defrauded by requiring that the
franchiser disclose detailed information on their operation at the first personal meeting, or at
least ten days before a franchise contract is signed, or before any money is paid.
60) Outline the recommended procedure for buying a franchise.

Answer: The most effective steps to buying a franchise are:
• Evaluate yourself
• Research your market
• Consider your franchise options
• Get a copy of the franchiser's FDD
• Talk to existing franchisees
• Ask the franchiser some tough questions
• Make your choice
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61) What are some indicators that a potential franchisee might be dealing with a dishonest
franchise? What steps can a potential franchisee take to avoid becoming a victim of a dishonest
franchise?
Answer: Indicators of a potentially dishonest franchise may include:
• Claims that contract is standard and "you don't need to read it"
• Failure to provide disclosure information
• Marginally successful or no prototype
• Oral promises of future earnings with no documentation
• High turnover rate
• Poor manual or none at all
• Unusual amount of litigation
• Attempt to discourage attorney advice
• High pressure sales
• Claiming to be exempt from federal laws
• Get-rich-quick schemes
• Reluctance to provide references
• Evasive or vague answers
Steps to take may be to:

• Do your research
• Ask for the franchiser's FDD
• Investigate the franchise thoroughly
• Apply preparation, common sense, and patience
62) Explain the following franchise concepts and give an example of each: multiple-unit
franchising, intercept marketing, conversion franchising, and master franchising.
Answer:
Multi-unit franchising is a method whereby a franchisee opens more than one unit within a
specific time frame.
Example: An individual or family owning all the local McDonald's.
Intercept marketing is the principle of putting a franchise's products or services directly in the
paths of potential customers, wherever they may be.
Example: Putting a scaled-down version of a Subway sandwich shop in a gas station
convenience store.
Conversion franchising is a trend in which owners of independent businesses become

franchisees to gain the advantage of name recognition.
Example: An Italian restaurant owner buys a franchise like the Olive Garden restaurant.
Master franchising is a method of franchising that gives the franchisee the right to create a semi-
independent organization in a particular territory to recruit, sell, and support other franchisees.
Example: An individual fluent in Spanish works to recruit as many franchisees as possible in
Spain.
Diff: 3 Page Ref: 180, 183-184
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63) Explain three trends that are currently shaping the franchising industry.
Answer: These current trends may include:
• Minority ownership
• Multiple-unit franchising
• Internationalism of American franchise system
• Master franchising
• Smaller, nontraditional locations
• Conversion franchising
• Piggyback or combination or multi-branded franchising
• Franchises serving dual-career couples and aging baby boomers
Mini-Case 6-1: Pipe Dreams
Ralph Emerson thought he'd been a librarian long enough, and when the opportunity arose to
open a small tobacco, pipe, and cigar shop in the newly renovated downtown business district, he
was ready to act. Pipe Dreams is a franchiser of smoke shops, and was founded eight years ago
by a noted tobacconist in New York City. The concept for the shops is simple, yet sophisticated.
It is simple in the sense that the shops sell only tobacco-related products, but sophisticated in the
breadth and quality of the inventory they carry. Each franchise, depending on size, is stocked
with inventory selected by the company's founder. The franchiser finances the shop's initial
inventory. The franchisee is expected to create a decor within predetermined standards that Pipe
Dreams establishes. Each franchisee must attend a three-day workshop, outlining the
fundamentals of tobacco blending, the merchandising of pipes and cigars, and the techniques of
successful business operation.
The franchise contract requires the franchisee to contribute 1.5 percent of gross revenue to a
national advertising campaign. According to the contract, Pipe Dreams will finance the required
fixtures for the store for ten years. In addition, the franchiser supplies all inventory at very
favorable prices because it purchases in large quantities.
Ralph knows he can buy tobacco products from a variety of wholesalers. He also has some ideas
on what would make a tobacco shop successful in this town. Ralph knows that Pipe Dreams
franchisees have had a high success rate in the past.
64) Help Ralph make a decision by outlining the advantages and the disadvantages of a franchise
arrangement.
Answer: This chapter outlines the advantages and disadvantages of franchise arrangements. The
case suggests that the Pipe Dreams franchise (like many franchises) offers the entrepreneur a
greater chance of success than "starting from scratch."
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65) Assuming that Ralph has adequate capital, would you recommend that he invest in the
franchise or open his own tobacco shop? Why?
Answer: Given Ralph's lack of experience in business, generally, and in managing a tobacco
shop, specifically, it probably is wise for him to take the franchise option. Once he learns the
business and gets established, he could explore the possibility of terminating the franchise
relationship.
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Essentials of Entrepreneurship & Small Business Management, 6e (Scarborough)

Chapter 6 Franchising and the Entrepreneur

1) A franchise is a system of distribution in which semi-independent business owners pay

4) McDonald's is an example of a ________ franchise.

7) Franchisers generally do which of the following regarding financial assistance to franchisees?

8) A significant advantage a franchisee has over an independent business is the participation in

14) Which of the following is not a potential disadvantage of a franchise?

15) A franchise myth is that:

16) Which of the following is an indication of a dishonest franchiser?

48) Absentee franchise owners are consistently successful.

Pure franchising outlets' sales are growing at a faster rate.

The drawbacks of franchising include:

60) Outline the recommended procedure for buying a franchise.

Steps to take may be to:

Conversion franchising is a trend in which owners of independent businesses become

Mini-Case 6-1: Pipe Dreams

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