Chapter 15

Question 1

Agency theory

Answer 1

A theory that, because managers are usually paid a salary, they may not have the same level of commitment to the success of their individual units as franchisees, who in effect own the units they manage.

Question 2

fiduciary obligation

Answer 2

The obligation to always act in another’s best interest; it is a mistake to assume that a franchisor has a fiduciary obligation to its franchisees.

Question 3

franchise agreement

Answer 3

The document that consummates the sale of a franchise, which typically contains two sections: (1) the purchase agreement and (2) the franchise or license agreement.

Question 4

FDD

Answer 4

Accepted in all 50 states and parts of Canada, this is a lengthy document that contains 23 categories of information that give a prospective franchisee a broad base of information about the franchisor’s background and financial health.

Question 5

franchisee

Answer 5

An individual or firm that enters into a franchise agreement and pays an initial fee and an ongoing royalty to a franchisor in exchange for using the franchisor’s trademark and method of doing business.

Question 6

franchising

Answer 6

A form of business organization in which a firm with a successful product or service (franchisor) licenses its trademark and method of doing business to other businesses (franchisees) in exchange for an initial franchise fee and an ongoing royalty.

Question 7

Franchisor

Answer 7

A firm with a successful product or service that enters into a franchising agreement to license its trademark and method of doing business to other businesses in exchange for a fee and royalty payments

The person lending the product and service