Question 1

A bargain price for an existing business is NOT a good deal for the buyer when the

Accepted Answer

A)  seller intends to open a competing business in the same locality. 
B)  business is losing money. 
C)  neighborhood is deteriorating. 
D)  All of these are correct. 
A)  seller intends to open a competing business in the same locality. 
B)  business is losing money. 
C)  neighborhood is deteriorating. 
D)  All of these are correct. D

Question 2

Identify and discuss some of the negative aspects associated with franchises.

Accepted Answer

Concerns of franchising include the following:
•	Financial Issues. Some franchisors may mislead prospective franchisees about earnings opportunities.
•	Churning. Unethical franchisors may engage in churning, or attempting to void the contracts of existing franchisees in order to sell the franchise to someone else and collect an additional fee.
•	Encroachment. A franchisor is said to encroach on a franchisee's territory when the franchisor sells another franchise location within the market area of an existing franchisee. Franchisors may also compete directly against their franchisees. This can occur when the franchisor opens a corporate-owned store near the franchisee's location or sell products via mail or online.
•	Management Issues. The franchise contract can impose limits on the activities of the franchisee, such as limiting sales territories, requiring site approval, imposing requirements regarding the store's appearance, limiting goods and services offered for sale, and limiting advertising and hours of operation.

Question 3

A nondisclosure agreement signed by a prospective buyer shows the seller that the buyer intends to purchase the business.

Accepted Answer

A) True 
 B)False  False

Question 4

Union contracts are among the many _____ factors in valuing a business.

Accepted Answer

A)  nominative 
B)  nonessential 
C)  nonquantitative 
D)  nonqualitative 
A)  nominative 
B)  nonessential 
C)  nonquantitative 
D)  nonqualitative

Question 5

Sister Mary Cupcake has partnered with the management of the toll road to operate her stores in the travel plazas. This arrangement is an example of

Accepted Answer

A)  master licensing. 
B)  piggyback franchising. 
C)  area development. 
D)  multibrand franchising. 
A)  master licensing. 
B)  piggyback franchising. 
C)  area development. 
D)  multibrand franchising.

Question 6

There are numerous techniques used for valuing a company, but they can be grouped into three basic methods. Which of the following is NOT one of those methods?

Accepted Answer

A)  Market-based valuation 
B)  Asset-based valuation 
C)  Expense-based valuation 
D)  Cash flow-based valuation 
A)  Market-based valuation 
B)  Asset-based valuation 
C)  Expense-based valuation 
D)  Cash flow-based valuation

Question 7

When evaluating the financial data of a 10-year-old business that is being considered for purchase, which of the following issues will be of least concern?

Accepted Answer

A)  Understated business income in an effort to minimize taxes 
B)  Unrealistically reduced levels of advertising cost 
C)  Business expenses related to personal use of vehicles 
D)  Not having the books for Years 1-5 due to a fire 
A)  Understated business income in an effort to minimize taxes 
B)  Unrealistically reduced levels of advertising cost 
C)  Business expenses related to personal use of vehicles 
D)  Not having the books for Years 1-5 due to a fire

Question 8

In what way is a franchisee's freedom to run the business greatly reduced?

Accepted Answer

A)  Most franchisors are located near the franchisee. 
B)  The franchisees are technically employees of the franchisor. 
C)  The franchisee is bound by the terms of the franchise contract. 
D)  The franchisee is completely dependent on the franchisor for funding. 
A)  Most franchisors are located near the franchisee. 
B)  The franchisees are technically employees of the franchisor. 
C)  The franchisee is bound by the terms of the franchise contract. 
D)  The franchisee is completely dependent on the franchisor for funding.

Question 9

A franchise contract

Accepted Answer

A)  should be drafted by both the franchisee and franchisor. 
B)  is drafted by, and most likely favors, the franchisee. 
C)  should be drafted by the franchisee's attorney. 
D)  is drafted by, and most likely favors, the franchisor. 
A)  should be drafted by both the franchisee and franchisor. 
B)  is drafted by, and most likely favors, the franchisee. 
C)  should be drafted by the franchisee's attorney. 
D)  is drafted by, and most likely favors, the franchisor.

Question 10

The practice of putting one franchise right next to another is referred to as piggyback franchising.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is considered an advantage of franchising?

Accepted Answer

A)  Franchising can be a way for existing companies to diversify. 
B)  Attractive franchisors offer value because they have names and trademarks that are well known to prospective customers. 
C)  A number of franchisors provide or facilitate financing for franchisees. 
D)  All of these are correct. 
A)  Franchising can be a way for existing companies to diversify. 
B)  Attractive franchisors offer value because they have names and trademarks that are well known to prospective customers. 
C)  A number of franchisors provide or facilitate financing for franchisees. 
D)  All of these are correct.

Question 12

Owners of nearly 7,000 7-Eleven franchise locations formed the National Coalition of Associations of 7-Eleven Franchisees and sued the franchisor, 7-Eleven, Inc., when they did not see the financial returns they expected. They attributed this to the franchisor

Accepted Answer

A)  not performing due diligence. 
B)  being misleading about earning opportunities. 
C)  burdening outlets with restrictive practices. 
D)  opening too many outlets. 
A)  not performing due diligence. 
B)  being misleading about earning opportunities. 
C)  burdening outlets with restrictive practices. 
D)  opening too many outlets.

Question 13

Martina's franchise agreement allows her to open up to seven new stores within a 100-mile radius of the first one. Martina is best described as a(n)

Accepted Answer

A)  master licensee. 
B)  franchisee. 
C)  franchisor. 
D)  area developer. 
A)  master licensee. 
B)  franchisee. 
C)  franchisor. 
D)  area developer.

Question 14

A potential franchise should be skeptical of a franchisor that

Accepted Answer

A)  owns more than one trade name. 
B)  pressures him or her to sign a contract without time for proper investigation. 
C)  is not a member of the International Franchise Association (IF
A) . 
D)  is not certified by the government. 
A)  owns more than one trade name. 
B)  pressures him or her to sign a contract without time for proper investigation. 
C)  is not a member of the International Franchise Association (IF
A) . 
D)  is not certified by the government.

Question 15

Match the term with its definition.
-A process for expanding a business and distributing goods and services through a licensing relationship

Accepted Answer

A) franchise 
B) franchise contract 
C) Franchise Disclosure Document (FD
D)  
D) franchisee 
E) Franchise Rule
F)franchising
G)franchisor
H)multibrand franchising
I)nondisclosure agreement
J)piggyback franchising 
A) franchise 
B) franchise contract 
C) Franchise Disclosure Document (FD
D)  
D) franchisee 
E) Franchise Rule
F)franchising
G)franchisor
H)multibrand franchising
I)nondisclosure agreement
J)piggyback franchising

Question 16

Match the term with its definition.
-The party in a franchise contract that specifies the methods to be followed and the terms to be met by the other party

Accepted Answer

A) franchise 
B) franchise contract 
C) Franchise Disclosure Document (FD
D)  
D) franchisee 
E) Franchise Rule
F)franchising
G)franchisor
H)multibrand franchising
I)nondisclosure agreement
J)piggyback franchising 
A) franchise 
B) franchise contract 
C) Franchise Disclosure Document (FD
D)  
D) franchisee 
E) Franchise Rule
F)franchising
G)franchisor
H)multibrand franchising
I)nondisclosure agreement
J)piggyback franchising

Question 17

Edward signed a contract allowing Francine to sell products using his trade name so long as the product meets Edward's quality standards. Edward is a(n)

Accepted Answer

A)  franchise. 
B)  franchisor. 
C)  franchisee. 
D)  independent business owner. 
A)  franchise. 
B)  franchisor. 
C)  franchisee. 
D)  independent business owner.

Question 18

H&R Block was sued by a franchisee for selling Internet services within the franchisee's territory without offering any compensation. This is an example of

Accepted Answer

A)  churning. 
B)  co-branding. 
C)  encroachment. 
D)  multibrand franchising. 
A)  churning. 
B)  co-branding. 
C)  encroachment. 
D)  multibrand franchising.

Question 19

Stuart is interested in opening a QRS franchise. QRS requires an up-front payment of $150,000. This amount represents

Accepted Answer

A)  Stuart's investment costs. 
B)  the initial franchise fee. 
C)  royalty payments. 
D)  marketing fees. 
A)  Stuart's investment costs. 
B)  the initial franchise fee. 
C)  royalty payments. 
D)  marketing fees.

Question 20

The legal agreement Irma signed with McDonald's that allows her to open a restaurant using the McDonald's name is a(n)

Accepted Answer

A)  master license. 
B)  area development plan. 
C)  lend-lease agreement 
D)  franchise contract. 
A)  master license. 
B)  area development plan. 
C)  lend-lease agreement 
D)  franchise contract.

Exam 4: Franchises and Buyouts

A bargain price for an existing business is NOT a good deal for the buyer when the

Identify and discuss some of the negative aspects associated with franchises.

A nondisclosure agreement signed by a prospective buyer shows the seller that the buyer intends to purchase the business.

Union contracts are among the many _____ factors in valuing a business.

Sister Mary Cupcake has partnered with the management of the toll road to operate her stores in the travel plazas. This arrangement is an example of

There are numerous techniques used for valuing a company, but they can be grouped into three basic methods. Which of the following is NOT one of those methods?

When evaluating the financial data of a 10-year-old business that is being considered for purchase, which of the following issues will be of least concern?

In what way is a franchisee's freedom to run the business greatly reduced?

A franchise contract

The practice of putting one franchise right next to another is referred to as piggyback franchising.

Which of the following is considered an advantage of franchising?

Owners of nearly 7,000 7-Eleven franchise locations formed the National Coalition of Associations of 7-Eleven Franchisees and sued the franchisor, 7-Eleven, Inc., when they did not see the financial returns they expected. They attributed this to the franchisor

Martina's franchise agreement allows her to open up to seven new stores within a 100-mile radius of the first one. Martina is best described as a(n)

A potential franchise should be skeptical of a franchisor that

Match the term with its definition. -A process for expanding a business and distributing goods and services through a licensing relationship

Match the term with its definition. -The party in a franchise contract that specifies the methods to be followed and the terms to be met by the other party

Edward signed a contract allowing Francine to sell products using his trade name so long as the product meets Edward's quality standards. Edward is a(n)

H&R Block was sued by a franchisee for selling Internet services within the franchisee's territory without offering any compensation. This is an example of

Stuart is interested in opening a QRS franchise. QRS requires an up-front payment of $150,000. This amount represents

The legal agreement Irma signed with McDonald's that allows her to open a restaurant using the McDonald's name is a(n)

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