CFC CFC Franchise Financial Analysis & Investment Evaluation 2 — Questions and Answers
Question 1: Which funding source involves the franchise candidate using retirement account funds to invest in a franchise without incurring early withdrawal penalties?
- SBA 7(a) loan
- ROBS (Rollover for Business Startups) (Correct answer)
- Home equity line of credit
- Angel investment
Correct answer: ROBS (Rollover for Business Startups)
ROBS (Rollover for Business Startups) allows individuals to use qualifying retirement funds to invest in a franchise or business without triggering taxes or early withdrawal penalties.
Question 2: When a CFC reviews a franchise's royalty structure, what does a 'sliding scale royalty' mean?
- The royalty rate is fixed regardless of revenue
- The royalty rate decreases as the franchisee's gross sales increase (Correct answer)
- The royalty rate increases based on inflation
- The royalty is paid quarterly rather than monthly
Correct answer: The royalty rate decreases as the franchisee's gross sales increase
A sliding scale royalty structure reduces the royalty percentage as gross sales exceed certain thresholds, rewarding higher-performing franchisees.
Question 3: What is the SBA 7(a) loan program most commonly used for in franchise financing?
- Refinancing existing personal debt
- Funding working capital, equipment, and real estate for eligible franchise openings (Correct answer)
- Providing grant money to first-time franchise owners
- Covering only the initial franchise fee
Correct answer: Funding working capital, equipment, and real estate for eligible franchise openings
SBA 7(a) loans are the most popular government-backed small business loans used by franchisees to fund working capital, equipment purchases, and real estate.
Question 4: What does EBITDA stand for, and why is it relevant when evaluating a franchise resale?
- Earnings Before Interest, Taxes, Depreciation, and Amortization — it reflects operational cash flow (Correct answer)
- Estimated Business Income Tax and Debt Allocation — it shows tax obligations
- Earnings Before Inventory Turnover, Deductions, and Assessments — it shows inventory value
- Effective Business Income and Total Debt Allocation — it shows net worth
Correct answer: Earnings Before Interest, Taxes, Depreciation, and Amortization — it reflects operational cash flow
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a proxy for operating cash flow and is commonly used as a valuation multiple when pricing franchise resales.
Question 5: A franchise candidate wants to compare two concepts with different royalty structures. One charges 6% of gross sales; the other charges a flat $2,000/month. At what monthly gross sales level would the flat fee be more economical?
- Below $20,000/month
- Above $33,333/month (Correct answer)
- Exactly $12,000/month
- Above $50,000/month
Correct answer: Above $33,333/month
At $33,333/month in gross sales, 6% equals $2,000; above that threshold the flat fee becomes less expensive than the percentage-based royalty.
Question 6: Which financial metric indicates how efficiently a franchise uses its assets to generate profit?
- Gross profit margin
- Return on assets (ROA) (Correct answer)
- Current ratio
- Accounts receivable turnover
Correct answer: Return on assets (ROA)
Return on assets (ROA) measures net income relative to total assets, showing how efficiently the business generates profit from its asset base.
CFC CFC Franchise Financial Analysis & Investment Evaluation 2
Which funding source involves the franchise candidate using retirement account funds to invest in a franchise without incurring early withdrawal penalties?