Chapter 4 - Franchising and buyouts

Question 1

Define Franchise

Answer 1

A business relationship in which an entrepreneur can reduce risk and benefit from the business experience of all members of the franchise system

Question 2

Define Franchisor

Answer 2

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

Question 3

Define Franchisee

Answer 3

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

Question 4

Define Franchise Contract

Answer 4

The legal agreement between franchisor and franchisee

Question 5

Define Franchise

Answer 5

The privileges conveyed in a franchise contract

Question 6

What is product and trade name franchising?

Answer 6

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

Question 7

What is business format franchising?

Answer 7

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

Question 8

What is a master licensee?

Answer 8

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

Question 9

What is a multi-unit ownership?

Answer 9

Ownership of a single franchisee of more than one franchise from a single company

Question 10

What are area developers?

Answer 10

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

Question 11

What is Piggyback franchising?

Answer 11

The operation of a retail franchise within the physical facilities of a host store

Question 12

What is Multi-Brand franchising?

Answer 12

The operation of several franchise organizations within a single corporate structure

Question 13

What is co-Branding?

Answer 13

Bringing two franchise brands together under one roof

Question 14

What are the pros of buying a franchise?

Answer 14

Trade names, operations manual, training support, economies of scale and financial support

Question 15

What are the cons of buying a franchise?

Answer 15

Financial Issues, franchisor competition and management issues

Question 16

Define Encroachment.

Answer 16

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

Question 17

Define churning

Answer 17

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

Question 18

What costs are associated with being a franchisee?

Answer 18

Initial investment fees, investment costs, royalty payments and advertising costs.

Question 19

What is a franchise disclosure document?

Answer 19

A document that provides the accepted format for satisfying the franchise disclosure requirements of the FTC

Question 20

What 6 things should a business owner consider if they want to become a franchisor?

Answer 20

Do they have a reproducible model? Financial considerations, required assistance, operations manual, government regulations and long term value.

Question 21

What is the franchise rule?

Answer 21

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

Question 22

What would someone want to buy an existing business? 4 reasons

Answer 22

Reduce uncertainty, established relationships with customers/suppliers, lower price than starting from scratch and quickly get started.

Question 23

What is a matchmaker service?

Answer 23

specialized broker that brings together buyers and sellers of businesses.

Question 24

Define due diligence

Answer 24

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

Question 25

What is a nondisclosure agreement?

Answer 25

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

Question 26

What is fair market value?

Answer 26

The price at which the property would change hands between a willing buyer and a willing seller, both parties having reasonable knowledge of the relevant facts.

Question 27

What are the 10 government concerns about franchising?

Answer 27

1. Misleading or exaggerated earnings claims by franchisors. 2. Opportunity behavior by which the franchisor becomes a competitive threat to franchisees. 3. Restrictions on franchisees who desire to liquidate their holdings in favor of alternative investment opportunities. 4. Conflicts of interest, such as when a franchisor forces franchisee to be captive outlets for other suppliers owned by the franchisor. 5. Churning. 6. Encroachment. 7. Imposing a non-compete clause. 8. One sided contracts. 9. The imposition of new restrictions at contract renewal time. 10. Franchisor intimidation of franchisees who attempt to form a franchisee association, seek alternative sources for products, or make other efforts to create a more level playing field.

Question 28

How does a franchisor control a franchisee? 5

Answer 28

Restricting sales territory. Requiring site approval on outlet’s appearance. Restricting what can be sold. Requiring specific operating hours. Controlling advertising.

Question 29

What 6 questions should you ask if you’re thinking about buying a franchise?

Answer 29

Is the franchisor dedicated to a franchise system as it’s primary merchandise of product and service distribution? 2. Does the franchisor produce and market quality goods/services for which there is an established market? 3. Does the franchisor enjoy a favorable reputation? 4. Will the franchisor offer and established, well-designed marketing and business plan? 5. Does the franchisor have good relations with franchisees? 6. Does the franchisor have a history of attractive earnings by franchisees?

Question 30

What are the 3 benefits of becoming a franchisor?

Answer 30

Reduction of capital requirements. Increase in management motivation. Speed of expansion.

Question 31

What are the 3 cons of becoming a franchisor?

Answer 31

Reduction in control. Sharing profits. Increase in operational support costs.

Question 32

What four things should someone consider about themselves before they think about buying a business?

Answer 32

1. Determine commitment. 2. Establish what you can afford. 3. Figure out what skills you have. 4. Consider lifestyle impact.

Question 33

Why would an owner sell an established business?

Answer 33

Old age/illness. Relocation. Desire to accept another position. Unprofitability of the business. Loss of exclusive sales franchise. Maturing of the industry and lack of growth potential.

Question 34

What is an Asset-Based valuation?

Answer 34

A way of valuing a business by estimating the value of a firm’s assets; does not reflect the value of the firm as a going concern.

Question 35

What is a Market-Comparable Valuation?

Answer 35

A way of valuing a business by comparing the sales prices of comparable firms.

Question 36

What is a Cash Flow Based Valuation?

Answer 36

A way of valuing a business by comparing the expected and required rates of return on the amount of capital to be invested in the business.