Test One

Question 1

Franchise

Answer 1

Method of doing business where in a franchisor licenses trademarks and tried and proven methods of doing business to a Franchise in exchange of payment

Question 2

What are the 2 forms of payment when buying a franchise

Answer 2

Franchise fee
- one time free
Royalty
- % of gross sales

Question 3

Franchisor generally require audited books why?

Answer 3

• to make sure they get paid

- failure can lead to non-renewal or cancelation

Question 4

What is the largest franchise?

Answer 4

Subway

Question 5

Two types of franchising

Answer 5

Product
- distribute products under corporate names
- gas stations, tire stores, John Deere
Business Format
- use a corporations brand name and operating system to serve a local market
- GNC, Subway, Motels

Question 6

What happened in the 1800s

Answer 6

Business Format Franchising
ex: Sewing machines in 51”
Coca-Cola in 90s

Question 7

What happened in the 1900s

Answer 7

20s- Retailing (Ben Franklin stores)
24’- Fast food (A&W root beer)
35’ - Restaurants (Howard Johnson’s)
38’ - Services (Arthur Murray Donne Studio)

Question 8

when did franchising take off?

Answer 8

50s/60s

Question 9

todays franchising:

Answer 9

80 industries

1.5 trillion nearly 10% of nations private sector economy

Question 10

is chick-fil-a a Franchise?

Answer 10

No, its a licensing agreement

Question 11

Shirking

Answer 11

when a Person does not put forth maximum effort because their compensation will not be affected by their work.

Question 12

Adverse Selection

Answer 12

The Tendency of people with lesser abilities put themselves forward as candidates for jobs more often than the overall population

Question 13

What are passive investors?

Answer 13

investors that do not have an effect on the business

Question 14

What are ROIs

Answer 14

Return On Investment

- Revenue / Amount of capital invested + Cost of generating revenues 
- Revenues are lower, but capital & cost are much lower 
- Net Effect is higher ROI

Question 15

Disadvantages to Franchising

Answer 15

Creates goal Conflicts
Transaction Cost Problems
Innovation and Change
Financial Returns

Question 16

Goal Conflicts

Answer 16

Maximizing Sales vs Maximizing Profits

Question 17

“Hold Up”

Answer 17

franchiser takes advantage of franchises investment in “Specific assets” to extract money from the franchisee

Question 18

“Free Riding”

Answer 18

Enjoying benefits without contributing equally to create those benefits

Question 19

Factors to determine if a Business concept can be franchised

Answer 19

Valuable system to sell
Transferable Concept
Large pool of franchises

• Failure with any of these can lead to franchising failure

Question 20

What percentage of new franchising systems cease franchising within 10 years

Answer 20

72%