Chapter 4: Franchises and Buyouts

Question 1

What is a franchise?

Answer 1

A business model that involves one business owner licensing trademarks and methods to an independent entrepreneur

Question 2

The owner of a trademark, service mark, trade name, or advertising symbol is called

Answer 2

Franchisor

Question 3

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

Answer 3

Franchisor

Question 4

An individual or group wishing to use the franchisor’s identification in a business is the

Answer 4

Franchisee

Question 5

An entrepreneur whose power is limited by a contractual relationship with a franchissing organization is the

Answer 5

Franchisee

Question 6

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

Answer 6

Business Format Franchising

Question 7

The franchisor provides a full range of services including site selection, training, product supply, marketing plans, and assistance in obtaining financing in this format

Answer 7

Business Format Franchising

Question 8

The legal agreement between franchisor and franchisee is the

Answer 8

Franchise Contract

Question 9

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

Answer 9

Master License

Question 10

Ownership by a single franchisee of more than one franchise from the same company

Answer 10

Multiple-Unit Ownership

Question 11

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

Answer 11

Area Developers

Question 12

Operation of a retail franchise within the physical facilities of another business

Answer 12

Piggyback Franchising

Question 13

Operating several franchise organizations within a single corporate structure

Answer 13

Multibrand Franchising

Question 14

Bringing two franchise brands together under one owner

Answer 14

Co-Branding

Question 15

The purpose of this is to protect, enhance, and promote franchising

Answer 15

The International Franchise Association

Question 16

An entrepreneur who enters into a franchising agreement acquires the right to use the franchisor’s

Answer 16

Trademark or brand name

Question 17

This protects words, names, symbols, sounds, or colors that distinguish goods and services from those manufactured or sold by others and to indicate the source of the goods

Answer 17

Trademark

Question 18

A trademark protects what?

Answer 18

The words, names, symbols, sounds, or colors that distinguish goods and services

Question 19

How long can trademarks be renewed?

Answer 19

Forever as long as they are being used in commerce

Question 20

What are the pros of franchising?

Answer 20

Trade names and trademarks
A proven business system
Training Support
Supply and Purchasing power
Financial Support

Question 21

What are the Cons of franchising?

Answer 21

Financial Issues
Franchisor Competition
Management Issues

Question 22

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

Answer 22

Churning

Question 23

The franchisor’s selling of another franchise location within the market area of an existing franchise

Answer 23

Encroachment

Question 24

What are the most common restrictions with management of a franchise?

Answer 24

Limiting sales territories
Requiring site approval for the retail outlet
Imposing requirements regarding outlet appearance
Limiting goods and services offered for sale
Limiting advertising and hours of operations

Question 25

What are the costs of being a franchisee?

Answer 25

Initial franchise fee
Investment costs
Royalty Payments
Advertising Costs

Question 26

Who investigates who when researching for a potential franchise opportunity?

Answer 26

The franchisor investigates the potential franchisee, and the franchisee investigates the franchisor

Question 27

A detailed statement of such information such as the franchisor’s finances, experience, size, and involvement in litigation is the

Answer 27

Franchise Disclosure Document

Question 28

The Franchise Disclosure Document must inform potential franchisees of these

Answer 28

Any restrictions, costs, and provisions for renewal or cancellation of the franchise

Question 29

Steps for finding a business to buy

Answer 29

Identify your interests
Consider your talents
List conditions for your business
Quantify your investment

Question 30

Specialized brokers who bring buyers and sellers of businesses together

Answer 30

Business Brokers

Question 31

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

Answer 31

Due Dilligence

Question 32

What are the most common reasons why owners sell their businesses?

Answer 32

Retirement
Illness
Partnership or family disputes
Unprofitability
Burnout
Lack of Capital for growth potential

Question 33

How far back should you ask for financial data

Answer 33

The past 5 years, or as many as available

Question 34

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

Answer 34

Nondisclosure Agreement

Question 35

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

Answer 35

Fair Market Value

Question 36

3 Basic Approaches used for valuing a company

Answer 36

Asset-Based Valuation
Market-Comparable Valuation
Cash-Flow Based Valuation

Question 37

How is the purchase price of a business determined?

Answer 37

Negotiation

Question 38

If the buyer buys the total entity of the business, the buyer then takes control of the business, as well as

Answer 38

Assuming any outstanding dept and hidden or unknown liabilities