Question 1

A franchise organization that is registered with the U.S. Small Business Administration will greatly speed up loan processing for a franchisee.

Accepted Answer

When a franchise organization is registered with the U.S. Small Business Administration (SBA), it means that the SBA has already reviewed and approved the franchise program's business model, training, and support systems. This pre-approval makes the loan process easier and faster for franchisees applying for loans through the SBA.

Question 2

When purchasing a business you should always have an attorney at the closing who represents both sides.

Accepted Answer

A single attorney cannot represent both parties as it would create a conflict of interest. Each party should have their own separate attorney to ensure their interests are protected during the transaction.

Question 3

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

Accepted Answer

The correct term for putting one franchise next to another is called co-branding or dual branding. Piggyback franchising is a different business concept that involves a secondary franchise operating within an existing business.

Question 4

As part of the valuation process, a buyer should scrutinize the seller's balance sheet to see whether asset book values are realistic.

Accepted Answer

Scrutinizing the seller's balance sheet is an important part of the valuation process, as it helps in assessing the accuracy of the asset book values.

Question 5

The advice of lawyers and accountants, if employed, should be strictly followed.

Accepted Answer

The advice of lawyers and accountants should be considered carefully, but it is ultimately up to the individual or business to decide whether to follow it, based on their specific circumstances and judgment.

Question 6

Legal commitments of an existing business are not a factor that needs to be evaluated by a prospective buyer.

Accepted Answer

Legal commitments of an existing business, such as contracts, leases, and outstanding lawsuits, can have a significant impact on the business's operations and financial standing. Therefore, a prospective buyer should evaluate and consider these legal commitments before making a purchase decision.

Question 7

Subway is the franchisee and the local owner is the franchiser?

Accepted Answer

The franchisee is the local owner who pays for the right to operate under the Subway brand and system, while the franchiser is Subway, the company that owns and manages the brand and system.

Question 8

The UFOC replaced the Franchise Disclosure Document (FDD) in May, 2008.

Accepted Answer

The Franchise Disclosure Document (FDD) replaced the Uniform Franchise Offering Circular (UFOC) in July 2007, not the other way around.

Question 9

All of the following are considered attractive characteristics of franchising except

Accepted Answer

The statement is asking for an unattractive characteristic of franchising, and option B presents an attractive characteristic instead. Therefore, option B is the best choice as the answer.

Question 10

The UFOC is the Uniform Franchise Offering Circular.

Accepted Answer

The UFOC (or FDD, Franchise Disclosure Document) is a legal document that franchisors in the United States are required to provide prospective franchisees. It provides detailed information about the franchising company, its history, financials, franchise fees, and other important information for the potential franchisee to consider before investing in the franchise. It was replaced by the Franchise Disclosure Document (FDD) in 2007, but some people still refer to it by its former name.

Question 11

The buyer of an existing business typically acquires its personnel, inventories, physical facilities, established banking connections, and ongoing relationships with trade suppliers.

Accepted Answer

When a buyer purchases an existing business, they generally acquire all of the assets and liabilities associated with the business, including personnel, inventories, physical facilities, established banking connections, and ongoing relationships with trade suppliers.

Question 12

Financial statements can mislead a potential purchaser trying to develop an accurate business valuation.

Accepted Answer

Financial statements may not always provide a complete and accurate picture of a business's financial health or future prospects. They can include non-recurring or one-time expenses, misleading accounting practices, hidden liabilities, or outdated information. Therefore, relying solely on financial statements to determine a business's value can lead to an inaccurate valuation.

Question 13

Conducting thorough due diligence should always be accomplished if purchasing an existing corporation or franchise, but is unnecessary if acquiring a sole proprietorship.

Accepted Answer

Conducting due diligence is still necessary when acquiring a sole proprietorship, as it allows the buyer to investigate the assets, liabilities, financial statements, and any potential legal issues associated with the business.

Question 14

All of the following are considered advantages of franchising except

Accepted Answer

Restricted sales territories are not generally considered an advantage of franchising. This can limit the franchisee's potential market and growth opportunities. The other options listed - reduced risk of failure, access to a proven system, and immediate economies of scale - are commonly viewed as benefits of franchising.

Question 15

While reading Inc. magazine, you come across an advertisement for a franchise opportunity that matches your interests; you should first look for independent, third-party sources of information to verify that the opportunity is legitimate.

Accepted Answer

It is recommended to always verify the legitimacy of a franchise opportunity by seeking information from independent, third-party sources to avoid falling victim to fraudulent schemes.

Question 16

Valuing a company is an easy task that results in a precise figure.

Accepted Answer

Valuing a company is a complex task that involves analysis of various factors such as financial statements, market conditions, competition, and more. The valuation figure is an estimate based on these factors and can have a range of variability.

Question 17

Aside from consulting an attorney, a potential franchisee should avoid using other sources of assistance.

Accepted Answer

While consulting an attorney may be necessary, potential franchisees should also consider using other sources of assistance, such as industry associations, franchise consultants, and current franchisees. It is important to gather as much information as possible before making a decision to invest in a franchise.

Question 18

An entrepreneur would choose a franchise over an independent startup most likely because of the

Accepted Answer

The answer of An entrepreneur would choose a franchise over...

Question 19

A firm's financial statements should not be adjusted because they conform with generally accepted accounting principles.

Accepted Answer

Financial statements may need to be adjusted in certain circumstances, such as errors or omissions in the original statements, changes in accounting standards or policies, or the discovery of fraud or misrepresentation. It is important to ensure that the financial statements accurately reflect the financial position and performance of the firm.

Question 20

Franchising offers both a proven line of business and product/service identification.

Accepted Answer

Franchising is built on the concept of replicating a successful business model and brand across multiple locations. Therefore, it provides a proven line of business and product/service identification.

Quiz 4: Franchises and Buyouts