Scarborough Eesbm8 tb07

Essentials of Entrepreneurship and Small Business Management, 8e (Scarborough)
Chapter 7 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
AACSB: Analytical Thinking
Learning Obj: 7-1 Describe the three types of franchising: trade name, product distribution, and
pure.
2) Franchises total annual sales represent more than ________ and employ nearly ________
workers in the Unities Sates in more than 300 industries.
A) $17 billion; 17 million
B) $120 billion; 8 million
C) $800 billion; 8.1 million
D) $225 billion; 21 million
Answer: C
Diff: 3
pure.
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 franchisor's trade name
without distributing the products exclusively under the franchisor's name.
A) Product distribution; trade name
B) Trade name; pure
C) Pure; trade name
D) Pure; product distribution
Answer: C
Diff: 3
pure.
1
Copyright © 2016 Pearson Education, Inc.
4) McDonald's is an example of a ________ franchise.
A) conversion forms
B) trade name
C) product distribution
D) pure
Answer: D
Diff: 2
AACSB: Reflective Thinking
pure.
5) 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
Diff: 1
pure.
6) Pure franchising involves the right to use all the elements of a fully integrated business
operation.
Answer: TRUE
Diff: 1
pure.
7) 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
Diff: 1
pure.
8) Pure franchising involves a system of franchising in which a franchisor sells a franchisee a

complete business format and system.
Answer: TRUE
Diff: 1
pure.
2
9) 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 (franchisor) 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.

Diff: 2
pure.
10) 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
Learning Obj: 7-2A Explain the benefits of buying a franchise.
11) Franchisors 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) Franchisors provide no assistance because having or finding financing is a requirement for
qualifying for a franchise.
Answer: B
Diff: 2
3
12) 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
Diff: 2
13) 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
Diff: 2
14) 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
Diff: 1
15) Franchise royalty fees typically range from ________ to ________ percent with an average
of 6.7 percent.
A) 3; 13
B) 1; 21
C) 1; 11
D) 3; 11
Answer: C
Diff: 3
4
16) When it comes to purchasing products, equipment, and incurring other expenses, the
franchisor ________.
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
Diff: 2
17) 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
Diff: 1
18) When a franchisee buys a franchise, she/he is purchasing the expertise and the business of
the franchisor.
Answer: TRUE
Diff: 1
19) A major advantage of a franchise contract is the national advertising campaign that most
franchisors provide free of charge for their franchisees.
Answer: FALSE
Diff: 1
20) 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
Diff: 2
21) Most franchisors provide extensive financial help such as loans and low-rate financing for
their franchises.
Answer: FALSE
Diff: 2
5
22) The failure rate for franchises is below that for other types of new businesses.
Answer: TRUE
Diff: 2
23) The bigger the franchise, the more successful the franchisees will be.
Answer: FALSE
Diff: 2
24) The franchise contract defines the rights and the obligations of both parties and sets the
guidelines that govern the franchise relationship.
Answer: TRUE
Diff: 1
25) Outline the benefits and drawbacks of buying a franchise.

Answer: Some of the primary benefits of franchising include:
∙ Becoming part of a business system
∙ Management and training support
∙ Brand name appeal
∙ Standardized quality of goods and services
∙ National advertising programs
∙ Financial assistance
∙ Proven products, processes and business formats
∙ Centralized buying power
∙ Site selection and territorial protection
∙ Greater chance for success
The drawbacks of franchising include:

∙ Franchise fees and ongoing royalties
∙ Strict adherence to standardized operations
∙ Restrictions on purchasing
∙ Limited product line
∙ Contract terms and renewal
∙ Unsatisfactory training programs
∙ Market saturation
∙ Less freedom
Diff: 3
Learning Obj: 7-2A; 7-2B Explain the benefits of buying a franchise.; Explain the drawbacks of
buying a franchise.
6
Mini-Case 7-1: 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 franchisor 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 franchisor finances the
shop's initial inventory. The franchisee is expected to create a decor within predetermined
standards that Pipe Dreams established. 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 franchisor 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.
26) 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."
The franchising benefits Ralph may experience might include:

∙ Becoming part of a business system
∙ Management and training support
∙ Brand name appeal
∙ Standardized quality of goods and services
∙ National advertising programs
∙ Financial assistance
∙ Proven products, processes and business formats
∙ Centralized buying power
∙ Site selection and territorial protection
∙ Greater chance for success
7
The drawbacks of franchising that Ralph may be prepared include:
∙ Franchise fees and ongoing royalties
∙ Strict adherence to standardized operations
∙ Restrictions on purchasing
∙ Limited product line
∙ Contract terms and renewal
∙ Unsatisfactory training programs
∙ Market saturation
∙ Less freedom
Diff: 2
Learning Obj: 7-2A; 7-2B Explain the benefits of buying a franchise.; Explain the drawbacks of
buying a franchise.
27) 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
Diff: 1
Learning Obj: 7-2B Explain the drawbacks of buying a franchise.
28) 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
Diff: 2
29) 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
Diff: 1
8
30) 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 needs 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 than independently owned businesses
Answer: A
Diff: 2
31) Quality is so important in franchising that most franchisors retain the right to terminate the
franchise contract and to repurchase the outlet if a franchisee fails to maintain quality standards.
Answer: TRUE
Diff: 2
32) In addition to other fees, franchisees must also pay royalties but only on net profits; in other
words, no profits, no royalties.
Answer: FALSE
Diff: 2
33) It is illegal for a franchisor to require franchisees to purchase products only from "approved
suppliers."
Answer: FALSE
Diff: 2
34) Having an attorney review and evaluate a franchise contract is unnecessary since the FTC
requires all franchisors to offer a "standard" franchise contract.
Answer: FALSE
Diff: 2
35) 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
Diff: 2
9
36) By signing the franchise contract, a franchisee typically surrenders some freedom and
autonomy in operating her/his business.
Answer: TRUE
Diff: 1
37) Absentee franchise owners are consistently successful.

Answer: FALSE
Diff: 2
38) Which of the following is an indication of a dishonest franchisor?

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
Diff: 1
Learning Obj: 7-3 Understand the laws covering franchise purchases.
39) The FTC's philosophy regarding the Uniform Franchise Disclosure Document (UFDD)
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 franchisors
Answer: C
Diff: 3
40) The Uniform Franchise Disclosure Document (UFDD) is a document that every franchisor is
required by law to give prospective franchisees before any offer or sale of a franchise.
Answer: TRUE
Diff: 2
10
41) If a franchisor 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 franchisor might be
dishonest.
Answer: TRUE
Diff: 1
42) What is the Franchise Disclosure Document? How can this document be of value to a
potential franchisee?
Answer: The law requires franchisors to register and deliver a copy to prospective 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
franchisor 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.
Diff: 2
43) Which of the following should make a potential franchisee suspicious about a franchisor'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
Diff: 2
Learning Obj: 7-4 Discuss the right way to buy a franchise.
44) In addition to reading the franchisor's UFDD, 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
Answer: D
Diff: 1
11
45) The franchisee turnover rate is the rate at which franchisees leave a franchise system.
Answer: TRUE
Diff: 1
46) A good method for evaluating a franchisor's reputation is to interview existing franchise
owners about the operation.
Answer: TRUE
Diff: 1
47) One of the first lessons in franchising is, "Do your homework before you get out your
checkbook."
Answer: TRUE
Diff: 1
48) 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
Diff: 2
49) The principle of placing smaller franchise units directly in the paths of potential customers is
referred to as intercept marketing.
Answer: TRUE
Diff: 2
50) Many franchises have discovered that small outlets in high-traffic, nontraditional locations
generate nearly the same sales volume as full-size outlets at a fraction of the cost.
Answer: FALSE
Diff: 2
12
51) 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 franchisor's UFDD
∙ Talk to existing franchisees
∙ Ask the franchisor some tough questions
∙ Make your choice
Diff: 3
52) 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 franchisor's FDD
∙ Investigate the franchise thoroughly
∙ Apply preparation, common sense, and patience
Diff: 3
13
Mini-Case 7-1: 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 franchisor 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 franchisor finances the
shop's initial inventory. The franchisee is expected to create a decor within predetermined
standards that Pipe Dreams established. 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 franchisor 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.
53) 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 business experience, and specifically in managing a tobacco
shop, it probably is wise for him to take the franchise option. The benefits the franchise offers in
the areas of management and training support, brand appeal, national advertising and a proven
business format may be particularly valuable for Ralph.
Diff: 2
54) Franchises have experienced three major growth waves since 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
Diff: 3
Learning Obj: 7-5 Outline the major trends shaping franchising.
14
55) 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) 20; 20.5
Answer: D
Diff: 3
AACSB: Diverse and Multicultural Work Environments
56) ________ is an emerging international market for U.S. franchisors that is expected to realize
the highest future growth rate.
A) Europe
B) Canada
C) Japan
D) China
Answer: D
Diff: 1
57) One of the major trends in franchising is the ________ of American franchise systems.
A) replication
B) conversion
C) internationalization
D) reduction
Answer: C
Diff: 2
58) The principle of putting a franchise's products or services directly in the paths of potential
customers with smaller, less expensive outlets is called ________.
A) cobranding
B) intercept marketing
C) area development
D) master franchise
Answer: B
Diff: 2
15
59) A franchise trend in which owners of independent businesses become franchisees to gain the
advantage of name recognition is called ________.
A) area development
B) master franchise
C) conversion franchising
D) cobranding
Answer: C
Diff: 2
60) In a ________ , a franchisee has the right to create a semi-independent organization in a

particular territory to recruit, sell, and support other franchisees.
A) multiple-unit franchise
B) master franchise
C) conversion franchise
D) cobranding franchise
Answer: B
Diff: 1
61) A method of franchising that gives the right to create a semi-independent organization in a
particular territory is a ________ franchise.
A) conversion
B) master
C) product distribution
D) area development
Answer: B
Diff: 2
62) When the franchisor 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) cobranding
C) conversion
D) master
Answer: D
Diff: 1
16
63) 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) cobranding
Answer: B
Diff: 2
64) 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) Cobranding
B) Conversion
C) Master
D) Subfranchising
Answer: B
Diff: 2
65) Establishing a Baskin-Robbins franchise inside a Blimpee's franchise is an example of

________ franchising.
A) multi-unit
B) master
C) cobranding
D) diversionary
Answer: C
Diff: 1
66) A master franchise gives the franchisee the right to create a semi-independent organization in
a particular territory to recruit, sell, and support other franchisees within a specific time frame.
Answer: TRUE
Diff: 1
17
67) A conversion franchising arrangement gives a franchisee the right to create a semi-
independent organization in a particular territory to recruit, sell, and support other franchisees.
Answer: FALSE
Diff: 1
68) Explain the following franchise concepts and give an example of each: area development,
intercept marketing, conversion franchising, master franchising and cobranding.
Answer:
Area development 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.
Cobranding is a method of franchising in which two or more franchises team up to sell

complementary products or services under one roof.
Example: KFC and Long John Silvers are located within the same facility.
Diff: 3
18
69) Explain three trends that are currently shaping the franchising industry.
Answer: These current trends may include:
∙ Minority and women ownership
∙ International opportunities
∙ Intercept marketing with smaller, nontraditional locations
∙ Conversion franchising
∙ Area development
∙ Master franchising
∙ Cobranding
Diff: 3
19

Scarborough Eesbm8 tb07

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Scarborough Eesbm8 tb07

Uploaded by

Copyright:

Available Formats

Essentials of Entrepreneurship and Small Business Management, 8e (Scarborough)

Chapter 7 Franchising and the Entrepreneur

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

5) A franchise is an arrangement in which semi-independent business owners pay fees and

8) Pure franchising involves a system of franchising in which a franchisor sells a franchisee a

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

10) Benefits of involvement in a franchise experience include ________.

11) Franchisors generally do which of the following regarding financial assistance to

25) Outline the benefits and drawbacks of buying a franchise.

The drawbacks of franchising include:

The franchising benefits Ralph may experience might include:

28) The failure rate for franchises is ________.

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

37) Absentee franchise owners are consistently successful.

38) Which of the following is an indication of a dishonest franchisor?

Steps to take may be to:

60) In a ________ , a franchisee has the right to create a semi-independent organization in a

65) Establishing a Baskin-Robbins franchise inside a Blimpee's franchise is an example of

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

Cobranding is a method of franchising in which two or more franchises team up to sell

You might also like