Small Business Chp IV - Franchises and Buyouts

Franchising

process for expanding a business and distributing goods or services through licensing arrangement

Each month, Tomas must report his gross income and pay a percentage of that amount to his franchisor. This percentage is

royalty fees

nondisclosure agreement

An agreement in which the buyer promises the seller that he or she will not reveal confidential information or violate the seller's trust.

master licensee

An independent firm or individual acting as a middleman or sales agent with the responsibility of finding new franchisees within a specified territory.

As a franchisee, costs involved in renting or building an outlet and stocking it with inventory and equipment are called

investment costs.

Michael opened a franchise restaurant within an existing business. He did what is known as:

Piggyback. franchising. This fairly recent development in franchising allows franchisors to get operating space without having to lease or buy an entire retail space.

multiple-unit ownership

a franchisee owns more than one unit (papa johns)

A _____ may be the single most valuable tool provided to a franchisee.

operations manual

When Subway operates a restaurant within a truck stop, it is an example of _____ franchising.

piggyback

Franchisee

sells goods or services supplied by the franchisor or that meet the franchisor's quality standards

Franchisor

specifies the methods to be followed and the terms to be met by the franchsee.

Product trade-name franchise

the privilege of using a widely recognized product or trademark

The greatest advantage of buying a franchise is

the probability of success

Which of the following is a reason for buying an existing business?

to acquire an ongoing business at a bargain price

Marvin is selling his business as a total entity. The buyer has offered a very large down payment, but Marvin would prefer a lower down payment and a longer repayment period. Which of the following is the most likely reason for this?

to reduce Marvin's annual tax liability on the profit of the sale

One of the disadvantages of franchising is the inability on part of franchisees to use franchisor's trade name and trademark.

False. A franchisee is the party in a franchise contract that is granted a license to do business under a particular trademark and trade name by the franchisor.

The basic features of the relationship between the franchisor and the franchisee are embodied in the broker contract.

False. The franchise contract is the legal agreement between franchisor and franchisee.

Entrepreneur's Top 5 Franchises for 2017 include all of these EXCEPT:

In 2017, the top five franchise organizations were 7-Eleven Inc., McDonald's, Dunkin' Donuts, The UPS Store, and Jimmy John's Gourmet Sandwiches. * (starbucks correct answer)

area developers

Individuals or firms that obtain the legal right to open several franchised outlets in a given area

The startup cost for a McDonald's franchise is:

McDonald's is one of the most successful franchises in history and thus requires a large initial investment.

If you are thinking of buying a business, negotiable factors external to the business exclude all but which of the following?

Neither the location of the business nor the traffic counts are factors that can be controlled in the negotiation

Which of the following companies is credited with being the first franchisor in the United States?

Singer Sewing Machine

business brokers

Specialized brokers that bring together buyers and sellers of businesses.

franchisor

The party in a franchise contract that specifies the methods to be followed and the terms to be met by the other party. Specifies the methods to be followed and the terms to be met by the franchisee.

Franchise

The right to sell a good or service within an exclusive market

franchise

The right to sell the licensing company's goods or services in a particular area

A Franchise Disclosure Document (FDD) is a detailed statement of such information as the franchisor's finances, experience, size, and involvement in litigation.

True

A franchising strategy whereby a single franchisee owns more than one unit of the franchised business is typically referred to as a multiple-unit ownership strategy.

True

The buyer of an existing business typically acquires its personnel, inventories, physical facilities, established banking connections, and ongoing relationships with trade suppliers and customers.

True

An example of a non-quantitative factor in buying a business is future community development.

True. Non-quantitative factors in valuing a business include market, competition, future community development, legal commitments, union contracts, buildings and product prices.

Under the restrictions of _____, the buyer promises the seller that he or she will not reveal confidential information or violate the trust that the seller has offered in providing the information.

a nondisclosure agreement

Which of the following are advantages of buying a franchise as opposed to starting one's own business from scratch?

a. Brand recognition b. Use of a recognized trademark c. The operations manual d. All of the above * (correct)

Which of the following is NOT a cost normally associated with franchise ownership?

a. Initial franchise fee b. A personal vehicle * (correct) c. Investment costs d. None of the above are costs normally associated with franchis

Franchise Contract

the legal agreement between franchisor and franchisee

churning

Actions by franchisors to void the contracts of franchisees in order to sell the franchise to someone else and collect an additional fee.

Jeffrey's job is to identify potential businesspeople in his country who might want to do business using a particular brand name. When the contract is signed, Jeffrey then provides training to the businessperson. Jeffrey is most likely a

Franchisor * wrong- maybe Franchisee

due diligence

The exercise of reasonable care in the evaluation of a business opportunity.

franchise contract

The legal agreement between franchisor and franchisee.

piggyback franchising

The operation of a retail franchised outlet within the physical facilities of a host store.

multibrand franchising

The operation of several franchised businesses within a single corporate structure.

encroach

To sell another franchise location within the market area of an existing franchisee.

One of the advantages of buying a franchise is that the purchaser has access to a business model with a proven track record.

True

Franchise Disclosure Document (FDD)

A detailed statement providing information about the franchisor that satisfies the franchise disclosure requirements of the FTC.

product and trade name franchising

A franchise agreement granting the right to use a widely recognized product or trademark.

franchising

A franchise agreement granting the right to use a widely recognized product or trademark. process for expanding a business or service through licensing arrangement

business format franchising

A franchise arrangement whereby the franchisee obtains an entire marketing, management, and supply system geared to entrepreneurs.

Franchise Rule

A rule that requires the franchisor to disclose certain information to prospective franchisees.

co-branding

Bringing two or more franchise brands together within a single enterprise.

All of the following are examples of companies that engage in business format franchising EXCEPT

Carl Jr. Jani-King Choice Hotels Goodyear tires ** correct

___ refers to actions by franchisors to void the contracts of franchisees in order to sell the franchise to someone else and collect an additional fee.

Churning

Which of these involves bringing two franchise brands together under one owner?

Co-branding

Tom took great care in investigating his purchase of an existing business. He was engaging in:

Due diligence. refers to the process of confirming that what is being represented is true.

The price at which the property would change hands between a willing buyer and willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts refers to

Fair market value is an agreed upon amount between buyer and seller.

A franchisor that sells another franchise location within the market area of an existing franchisee is using a piggybacking franchising strategy.

False

A nondisclosure agreement signed by a prospective buyer shows the seller that the buyer intends to purchase the business.

False

According to Entrepreneur magazine's "Top Franchises for 2017," McDonald's is not ranked in the top five franchises.

False

Due to a decrease in the number of franchises over the past decade, the task of selecting an appropriate franchise has become more difficult.

False

Perhaps the most fundamental argument against the franchise model is that it increases the level of risk for business owners.

False

Research finds that due to lack of control, franchising is more risky than starting a business from scratch.

False

To control costs when purchasing a business, the buyer's attorney or the seller's attorney can be used as the closing agent.

False

Sally has opened five successful candy shops and wishes to capitalize on the scalability of her business by franchising. Which of the following should she consider before going that route?

a. She should determine whether her business systems are well-defined and replicable. b. She should see if she can get sufficient financing to deploy the franchise. c. She should research government regulations regarding her obligations to disclose certain information to potential franchisees. d. She should do all of the above *(correct)

If you are thinking of buying a business, negotiable factors internal to the business include all but which of the following?

a. Whether the seller will agree not to compete with you after the sale. b. The value of the goodwill the business has with suppliers.Both a and b are negotiable

Which of the following is NOT information contained in a disclosure document?

a. franchisor's financial statements b. franchisor's selling price * (correct) c. franchisor's financial obligations d. franchisor's involvement in litigation

Jasper is evaluating a business for possible purchase. He needs to know what a fair offering price should be. One way to do this would be t

appraise the value of the assets of this business

In _____ franchising, a franchisor owns the right to a name or trademark and sells that right to a franchisee and often provides a full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing.

business format

Entrepreneurs who receive an entire marketing and management system are participating in

business format franchising

The purchase price of a business is determined by negotiation between _____ and _____

buyer and seller

When the franchisor sells another franchise location within the market area of an existing franchisee, it is called

encroachment

The party in a franchise contract that specifies the methods to be followed and the terms to be met by the other party is called a(n)

franchisor

Owners of nearly 7,000 7-Eleven franchise locations formed the National Coalition of Associations of 7-Eleven Franchisees and sued the franchisor, 7-Eleven, Inc., when they did not see the financial returns they expected. They attributed this to the franchisor

hiding some important documents

Master liscensee

independent firm or individual acting as a middleman or sales agent with the responsibiltiy of finding new franchisees within a particular region or territory