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Exam 7: Franchising and the Entrepreneur

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Question 31

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A major advantage of a franchise contract is the national advertising campaign that most franchisors provide free of charge for their franchisees.

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Question 32

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A method of franchising that gives the right to create a semi-independent organization in a particular territory is a ________ franchise.

A) conversion
B) master
C) product distribution
D) area development

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Question 33

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Mini-Case 7-1: Pipe Dreams Ralph Emerson thought he'd been a librarian long enough, and when the opportunity arose to open a small tobacco, pipe, and cigar shop in the newly-renovated downtown business district, he was ready to act. Pipe Dreams is a franchisor of smoke shops, and was founded eight years ago by a noted tobacconist in New York City. The concept for the shops is simple, yet sophisticated. It is simple in the sense that the shops sell only tobacco-related products, but sophisticated in the breadth and quality of the inventory they carry. Each franchise, depending on size, is stocked with inventory selected by the company's founder. The franchisor finances the shop's initial inventory. The franchisee is expected to create a decor within predetermined standards that Pipe Dreams established. Each franchisee must attend a three-day workshop, outlining the fundamentals of tobacco blending, the merchandising of pipes and cigars, and the techniques of successful business operation. The franchise contract requires the franchisee to contribute 1.5 percent of gross revenue to a national advertising campaign. According to the contract, Pipe Dreams will finance the required fixtures for the store for ten years. In addition, the franchisor supplies all inventory at very favorable prices because it purchases in large quantities. Ralph knows he can buy tobacco products from a variety of wholesalers. He also has some ideas on what would make a tobacco shop successful in this town. Ralph knows that Pipe Dreams franchisees have had a high success rate in the past. -Help Ralph make a decision by outlining the advantages and the disadvantages of a franchise arrangement.

The principle of putting a franchise's products or services directly in the paths of potential customers with smaller, less expensive outlets is called ________.

A conversion franchising arrangement gives a franchisee the right to create a semi-independent organization in a particular territory to recruit, sell, and support other franchisees.

Benefits of involvement in a franchise experience include ________.

The Uniform Franchise Disclosure Document (UFDD) is a document that every franchisor is required by law to give prospective franchisees before any offer or sale of a franchise.

The FTC's philosophy regarding the Uniform Franchise Disclosure Document (UFDD) focuses on ________.

A significant advantage a franchisee has over an independent business is the participation in the franchisor's ________ largely due to the ________ the franchise offers.

When a franchisee buys a franchise, she/he is purchasing the expertise and the business of the franchisor.

Which of the following is not a potential disadvantage of a franchise?

The failure rate for franchises is below that for other types of new businesses.

The failure rate for franchises is ________.

In a ________ , a franchisee has the right to create a semi-independent organization in a particular territory to recruit, sell, and support other franchisees.

Having an attorney review and evaluate a franchise contract is unnecessary since the FTC requires all franchisors to offer a "standard" franchise contract.

A franchise is an arrangement in which semi-independent business owners pay fees and royalties to a parent company in return for the right to sell its products or services and often to use its business format and system.

Examples of some benefits franchise systems offer include management training, brand appeal, standardization of goods and services, national advertising, proven business formats, centralized buying power, and site selection assistance.

Franchise royalty fees typically range from ________ to ________ percent with an average of 6.7 percent.

Absentee franchise owners are consistently successful.

Pure franchising involves the right to use all the elements of a fully integrated business operation.