Franchise Trade Franchise Quiz:
Test your Franchise IQ

by Patricia Schaefer

Would you know the difference between franchise "fact" and franchise "fiction"? Could you spot a franchise misconception or myth if you saw one? Just how knowledgeable are you about the world of franchising?

Take our "true" or "false" franchise quiz and find out just how "franchise-savvy" you really are. Answers and needed explanations follow the quiz.

True or False?

1. Franchising is a business system whereby a franchisor sells trademarks and other methods of doing business to a franchisee in exchange for franchise fees.

2. When people think of franchising, they often think of McDonalds. This restaurant chain was the first franchised restaurant in the U.S. to become a big franchising success.

3. Franchise operations today account for nearly 30 percent of U.S. retail sales.

4. Certain items in a franchise agreement may be negotiable.

5. According to the FTC (Federal Trade Commission) Franchise Rule, franchisors at contract renewal must honor and continue the terms and conditions of the original franchise agreement.

6. When assessing franchisors in the same industry, you may find greater success with the franchisor that has fewer franchises in its chain.

7. In franchising, the two primary legal documents are the disclosure document -- typically in the form of the Uniform Franchise Offering Circular (UFOC) - and the franchise agreement.

8. The purpose of the UFOC is to provide prospective franchisees with enough information about the franchisor, its system and agreements so they can analyze the merits of a potential franchisor and make an informed decision.

9. Overcapitalization is one of the top reasons new franchisees fail.

10. Franchisors are generally looking for franchise candidates who have specific skills and experience in their industry.

11. The Small Business Administration (SBA) lends money to small business owners, including franchisees.

12. Every franchise system is basically set up the same.

13. In order to purchase a franchise, a franchisee will most likely need to come up with about 30 percent of the total investment needed to start the business.

14. The truth about franchising is that most franchisees do not "get rich" and usually work long hours, especially the first year.

15. There are hundreds of franchises that costs $50,000 or less.

Answers

1. False

Franchising is a business system whereby a franchisor licenses, not "sells" trademarks and other methods of doing business to a franchisee in exchange for franchise fees. As a franchisee, you are not "buying" the franchise; you are "licensed" to use the brand name and operating methods.

2. False

Almost 20 years before McDonald's started franchising their restaurants, Howard Johnson's in 1935 in Orleans, Massachusetts opened its first franchised restaurant. By 1954, there were 400 Howard Johnson's restaurants across the U.S. It wasn't until 1955 that McDonald's CEO Ray Kroc opened their first franchised restaurant.

3. False

About 50 percent of our U.S. retail sales today are from franchised operations. The number of franchises in the United States has been steadily increasing since the 1950's. Annual franchise sales now total more than $1 trillion.

4. True

Certain items in a franchise agreement may be negotiable. Franchisees should seek the help of a qualified franchise attorney to evaluate and discuss potential changes to franchise agreements with franchisors.

5. False

Franchise contract renewals need not provide the original terms and conditions. The franchisor may, among other things, raise the royalty payments, reduce the franchisee's territory or impose new sales restrictions.

6. True

Bigger is not always better. A franchise system that is growing in leaps and bounds may, for example, be lacking in the support they provide to their many franchisees. Check with their franchisees, and franchisees in other systems, for satisfaction levels.

7. True

8. True

9. False

On the contrary, too many franchisees find they do not have enough money to start and survive the early stage of their franchised business. They often underestimate the money they will need and the time it will take until the business becomes profitable. It is usually best to keep in mind the old adage: "It takes twice as long and costs twice as much."

10. False

Most franchisors are looking for people with no experience in their industry. They find teaching an individual "from scratch" easier than getting an individual to unlearn specific skills that don't match their operating system.

11. False

The SBA itself does not lend money. It has programs where it serves as a third party guarantor on loans made to small business owners by a number of "preferred" banks throughout the country.

12. False

All franchises are not the same. Each franchise will be set up differently, even within the same industry. Some differences include: services provided, support level for franchisees, amount of training, and degree of control.

13. True

Lenders like to be sure you personally have a vested interest in your new business. The more money owners have invested in their business, the easier it is to attract financing.

14. True

Many franchisees complain they earned less than they expected. You'll want to find out before you make your investment how much money you can expect to make with a particular franchise. Find out what the "typical," not "average," income of franchisees is. Average figures are misleading, as a few very successful franchisees can inflate the average. And like any other business owner, most franchisees work fairly long hours.

15. True

Lower investment franchising has become white-hot with perfectly reputable and successful businesses available at less than $50,000. They include pet services, home and carpet cleaning, fitness centers and supplemental education. Prospective franchisees still need to thoroughly research these opportunities in order to make confident and sound investments.

Copyright 2006, Attard Communications, Inc.