Buying a Business and Franchising Answer Key

Chapter 05 Buying a Business and Franchising Multiple Choice Questions 1. It is argued in the text that the most significant advantage of buying a business is A. it has already been registered with the authorities. B. it has inventory. C. it has an established image and track record. D. to avoid being sued. 2. Which of these is not an advantage of purchasing an existing small business? A. Established marketing structure B. Existing employees C. More opportunity to be creative D. Increased number of competitors Chapter 05 - Buying a Business and Franchising 3. According to the text, most businesses that are for sale A. are only marginally successful. B. have valuable locations to transfer to a new owner. C. provide a steady base on which it can be expanded. D. have solid banking arrangements in place. 4. Goodwill A. is the process of extending credit to needy customers. B. measures the added value of a product. C. always exists so long as a business operates. D. is essentially a business's favourable reputation. 5. Common sources of businesses for sale include A. supermarket ad boards. B. trade journals. C. yellow pages (hard copy or web-based). D. FAQ pages. Chapter 05 - Buying a Business and Franchising 6. If a business is not listed as being for sale A. its privacy should be respected. B. then it won't be for sale. C. it's not worth investigating it. D. a prospective purchaser can ask the owner if they would be interested in selling. 7. Government departments A. are not likely to be aware of business for sale. B. are never connected with individual businesses. C. may be aware of businesses for sale. D. often act as brokers in connecting purchasers and sellers of businesses. 8. Which is not a common source of businesses for sale? A. Internet B. Real estate brokers C. Community centre ad board D. Word of mouth 5-3 Chapter 05 - Buying a Business and Franchising 9. Industry analysis may not be required if A. a buyer has considerable experience in the industry. B. the cost to do so would be prohibitive. C. there is no information readily available. D. the industry is not dominated by one large business. 10. A noncompete clause is designed to guard against A. the previous owner starting a similar business in any market area. B. future owners starting a similar business in any market area. C. future owners starting a similar business in the same market area. D. the previous owner starting a similar business in the same market area. 11. When purchasing a business, non-liquid assets A. should be considered not to have any value. B. should be subjected to an independent appraisal. C. should by ignored for business planning purposes. D. should be valued at 20% of total fixed assets. 5-4 Chapter 05 - Buying a Business and Franchising 12. Strong customer relations is usually an indicator A. of a market with few competitors. B. of a high-demand product or service. C. of good management and employees. D. of low pricing. 13. Which is not one of the four approaches to valuing a business? A. Market Value B. Asset Value C. Equity Value D. Earnings Value 14. Market value is A. the price where demand and supply meet. B. the lowest amount that a seller will accept in the market. C. the average of the three most recent sales transactions in an industry. D. the net realizable value of a business's fixed assets. 5-5 Chapter 05 - Buying a Business and Franchising 15. The times earnings method is also called A. productivity velocity method. B. return on investment accelerator. C. efficiency measure. D. price-earnings ratio. 16. An offer to purchase will most likely be made A. to the seller's CEO. B. by the buyer or through a realtor or lawyer. C. by the buyer's banker on behalf of the buyer. D. anonymously (until accepted). 17. Which of these provinces have not passed legislation requiring greater financial disclosure by franchisors? A. Manitoba B. Alberta C. Ontario D. Saskatchewan 5-6 Chapter 05 - Buying a Business and Franchising 18. One of the attractive benefits of being a franchisee is A. future income is a high certainty. B. it can replace a lost job. C. there is no need to learn about an industry in depth. D. the total freedom of owning your own business. 19. According to research, traditional franchise businesses include A. hotels. B. construction. C. retailing. D. soft drink bottlers. 20. The fastest growing sector in the Canadian economy is the A. service sector. B. professional sector. C. manufacturing sector. D. import/export sector. 5-7 Chapter 05 - Buying a Business and Franchising 21. Under a franchising arrangement A. a franchisor owns an outlet. B. both the franchisor and the franchisee operate an outlet. C. a franchisee owns an outlet. D. a franchisee develops the best system for their outlet. 22. ________ is a type of franchise. A. Manufacturer-retailer-directed B. Wholesaler-retailer-directed C. Retailer-service depot D. Service-retailer depot 23. A franchise system can best be characterized as A. a voluntary chain. B. a money-making machine. C. a business excellence strategy. D. an approach to market dominance. 5-8 Chapter 05 - Buying a Business and Franchising 24. When a manufacturer of a product grants a dealer the right to sell the product, normally in an exclusive geographic area. A. Manufacturer-retailer-directed franchise B. Wholesaler-retailer-directed franchise C. Retailer-service depot D. Manufacturer-directed franchise 25. Established franchises can provide A. guaranteed cash flow. B. franchisee success. C. instant brand recognition. D. healthy opportunities for franchisee creativity. 26. Franchisee training is most likely to involve A. Internet research. B. personal industry reading. C. competitor research. D. site visits. 5-9 Chapter 05 - Buying a Business and Franchising 27. Potential franchisees will usually have to provide A. the names of relatives who have succeeded in business. B. collateral. C. a current health certificate. D. their work history. 28. Which is not a common franchise agreement restriction? A. Product or service offered B. Line forcing C. Exaggeration of financial success D. Remodelling clauses 29. Which is not a potential disadvantage of franchising? A. Proven dispute resolution methods B. Saturation of the market C. Cost of the franchise D. Lack of security 5-10 Chapter 05 - Buying a Business and Franchising 30. Which is not a typical question that a potential franchise should find answers to prior to purchasing a franchise? A. Does the franchisor have expertise in production, finance, and marketing? B. Are most of the expenses of the franchise a function of the fees from the sale of franchises? C. How many franchises are in the organization? D. How successful is each of the members of the franchise organization? 31. A proven franchise offers A. greater opportunity and more freedom. B. small market share and weaker competition. C. lower risk and higher financial investment. D. higher returns and reduced employee turnover. 32. Of the following elements, a potential franchisor should be concerned most about A. supply chains. B. renewal and termination terms. C. hours of business operation. D. future Canadian/US dollar exchange rates. 5-11 Chapter 05 - Buying a Business and Franchising 33. Franchises with territorial protection A. are the most desirable. B. are increasing in frequency. C. are generally not possible. D. are illegal due to non-competition laws. 34. Becoming a franchisor A. is a retirement strategy. B. is a way of reducing one's management pressures. C. is inevitable in a successful business. D. is a form of entrepreneurship. 35. Secret shoppers A. refers to customers who pretend not to be interested in making a purchase. B. means asking someone else to make your purchase in their name. C. is a strategy used by some franchisors. D. are used by government agencies to detect tax fraud. 5-12 Chapter 05 - Buying a Business and Franchising 36. Converting existing chain outlets into franchises is called A. mini-franchises. B. branchising. C. piggybacking. D. teamchising. 37. Future growth of franchising will A. reduce employment numbers. B. make competition more difficult for small businesses in certain industries. C. result in less competition. D. lead to more monopolies. 5-13