Franchise Quiz
Questions: 16 · 10 minutes
1. A franchisee wants to alter the store layout and create local packaging. What is the most appropriate first step?
Make both changes immediately because the franchisee owns the local business
Ask neighboring businesses whether the changes seem consistent with the area
Register the new packaging as a separate brand before informing the franchisor
Check the agreement and operating standards, then seek any required franchisor approval
2. Which statement best distinguishes a franchisor from a franchisee?
The franchisor licenses its brand and system; the franchisee operates a business under that system.
The franchisor owns every outlet, while the franchisee manages one as an employee.
The franchisor supplies financing, while the franchisee supplies only labor.
The franchisor controls the local market, while the franchisee owns the brand trademarks.
3. Two franchises charge similar initial fees, but one requires more equipment, inventory, and opening cash. Which figure gives the better starting comparison?
The estimated total initial investment, including required opening expenses and working capital
The initial franchise fee by itself
The franchisor’s total company revenue
The number of pages in each franchise agreement
4. A franchise agreement will expire next year. Which statement about renewal is most accurate?
Renewal is always automatic if the location remains open
Renewal transfers ownership of the trademarks to the franchisee
Renewal permanently preserves every term in the original agreement
Renewal usually depends on contractual conditions and may involve notice, fees, upgrades, or a current agreement
5. You want to learn whether promised support continues after opening. Whom should you contact during due diligence?
Only the salesperson assigned to the franchise opportunity
A varied group of current and former franchisees, where contact is permitted
Only applicants who have not yet opened a location
Only the system’s highest-revenue franchisee
6. An investor wants a largely passive business, but current franchisees say this system requires the owner on site most days. What is the clearest conclusion?
The franchise must be unprofitable because owners work on site
The investor can disregard the requirement after paying the initial fee
The system’s operating model may not fit the investor’s intended level of involvement
The franchisor is legally required to redesign the role for passive ownership
7. Where a franchise disclosure document is required or supplied, what is its main purpose?
To guarantee the future profitability of each new location
To replace the final franchise agreement and all professional advice
To provide material information about the franchisor, system, fees, obligations, and risks
To serve as the franchisee’s operating manual after opening
8. A franchisor lists training and field support, but you want to judge how useful they are in practice. What is the best next step?
Assume the support is comprehensive because it appears in marketing materials
Compare the training course length with the agreement’s full term
Judge support quality solely by the size of the franchisor’s head office
Ask franchisees for specific examples of support received, response times, and unresolved gaps
9. When comparing unit economics, which information is generally most useful?
The franchisor’s social-media following and national advertising reach
The total number of trademarks registered by the franchisor
The highest sales figure ever achieved by any unit in the system
Revenue, operating costs, and cash-flow patterns for genuinely comparable established units
10. A new location is expected to operate at a loss for its first few months. Which resource is specifically intended to help cover that period?
The franchisor’s trademark registration
Adequate working capital included in the opening budget
The protected territory boundary
The term length of the franchise agreement
11. What is a continuing royalty fee in a typical franchise arrangement?
A refundable deposit held until the franchise agreement expires
An ongoing payment, often calculated from sales, for participation in the franchise system
A one-time payment that purchases ownership of the franchisor
A government fee charged whenever a franchise changes managers
12. A unit has monthly fixed costs of $20,000 and a contribution margin of 40%. Approximately how much monthly sales revenue is needed to cover those fixed costs?
$8,000
$50,000
$60,000
$80,000
13. What does a protected territory clause generally provide?
A guarantee that no competing business can operate in the area
Ownership of all customers who live within a defined boundary
Contractual limits on certain same-brand competition within a defined area
Permanent rights to open unlimited units throughout a region
14. A franchise charges a 6% royalty on gross sales. If a unit records $100,000 in applicable gross sales for a period, what is the royalty before any contractual adjustments?
$6,000
$10,000
$16,000
$60,000
15. A salesperson presents an attractive earnings projection for a franchise. How should a prospective buyer evaluate it?
Check documented financial-performance information and assumptions, test comparability, and consult appropriate advisers
Compare it only with revenue from the system’s top-performing outlet
Treat it as a guaranteed minimum because it came from a system representative
Ignore operating costs because the projection concerns sales potential
16. A franchisee plans to sell the business to a qualified buyer. What should be reviewed before assuming the agreement can simply be handed over?
Only the buyer’s preferred opening hours
Only the original amount paid for equipment
Transfer provisions, approval requirements, fees, and any required upgrades or training
The advertising calendar for the next quarter