Chapter Four

Question 1

Franchisor

Answer 1

Person who owns a franchise. A party in franchise contract that specifies methods to be followed and terms to be met by the other party

Question 2

Franchisee

Answer 2

An entrepreneur whose power is limited by a contractual agreement with the franchisor

Question 3

Franchise contract

Answer 3

The legal agreement between franchisor and franchisee

Question 4

Franchise

Answer 4

The privileges conveyed in the franchise contract

Question 5

Advantages of franchising

Answer 5

– Probability of success
– Training
– Financial assistance
– Operating benefits

Question 6

Limitations of franchising

Answer 6

– Franchise costs
– Restrictions on business operations
– Loss of independence
– Lack of franchisor support

Question 7

Churning

Answer 7

Terminating a successful franchise operation in order to resell it and gain additional franchise fees

Question 8

Encroachment

Answer 8

Locating a new outlet or points of distribution too close to an existing franchisee, causing material loss of sales

Question 9

Product and tradename franchising

Answer 9

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

Question 10

Business format franchising

Answer 10

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

Question 11

Master licensee

Answer 11

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

Question 12

Multiple unit ownership

Answer 12

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

Question 13

Area developers

Answer 13

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

Question 14

Piggyback franchising

Answer 14

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

Question 15

Multi brand franchising

Answer 15

The operation of several franchise organizations within a single corporate structure

Question 16

Co-branding

Answer 16

Bringing two or more franchise brands together under one roof

Question 17

Due diligence

Answer 17

The exercise of prudence, such as would be expected of a reasonable person, in the careful evaluation of a business opportunity

Question 18

Asset-based valuation

Answer 18

Estimates the value of the firms assets; does not reflect the value of the firm as a going concern

Question 19

Market comparable valuation

Answer 19

Considers the sale prices of comparable firms; difficulties in finding comparable firms

Question 20

Cash flow based valuation

Answer 20

Compares the expected and required rates of return on the amount of capital to be invested in the business

Question 21

Franchise disclosure document

Answer 21

A detailed statement that provides the excepted format for satisfying the franchise disclosure requirements of the FTC

Question 22

Franchise rule

Answer 22

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

Question 23

Business brokers/ matchmakers

Answer 23

Specialize brokers that bring together buyers and sellers of business

Question 24

Nondisclosure agreement

Answer 24

An agreement in which the buyer promises the seller that he or she will not reveal confidential information or violate the sellers trust

Question 25

Fair market value

Answer 25

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

Question 26

Franchising

Answer 26

A marketing system involving a legal agreement, whereby the franchisee conducts business according to the terms specified by the franchiser