CFE CFE Franchise Development & Expansion 2 — Questions and Answers
Question 1: A franchisor is considering expanding internationally. What is the most common entry strategy that involves partnering with a local entity to develop multiple units in a country?
- Direct franchising
- Master franchise agreement (Correct answer)
- Joint venture
- Company-owned expansion
Correct answer: Master franchise agreement
A master franchise agreement grants a local master franchisee the right to sub-franchise within a defined territory, leveraging local market knowledge.
Question 2: Which of the following best describes a 'franchise resale' or 'transfer'?
- A franchisor selling its brand to a competitor
- An existing franchisee selling their unit to a new owner with franchisor approval (Correct answer)
- The franchisor repurchasing underperforming units
- Converting a company-owned unit to a franchise
Correct answer: An existing franchisee selling their unit to a new owner with franchisor approval
A franchise transfer occurs when an existing franchisee sells their unit(s) to a new buyer, subject to the franchisor's approval and transfer fee requirements.
Question 3: What is the key distinction between a 'single-unit franchise agreement' and an 'area development agreement'?
- Area development requires a larger royalty
- Area development grants rights to open multiple units on a schedule (Correct answer)
- Single-unit agreements last longer
- Area development eliminates territory protection
Correct answer: Area development grants rights to open multiple units on a schedule
An area development agreement commits the franchisee to open a predetermined number of units within a defined territory according to a development schedule.
Question 4: When evaluating a candidate franchise market, which analysis method divides a trade area by demographic, psychographic, and competitive factors?
- SWOT analysis
- Site selection matrix
- GIS-based trade area analysis (Correct answer)
- Break-even analysis
Correct answer: GIS-based trade area analysis
Geographic Information System (GIS) analysis overlays multiple data layers—demographics, traffic, competition, and income—to identify optimal franchise locations.
Question 5: In franchise development, what does 'validation' refer to in the prospect's discovery process?
- The FDD compliance review
- Prospects contacting existing franchisees to verify franchisor claims and culture (Correct answer)
- The franchisor's financial audit
- Legal review of the franchise agreement
Correct answer: Prospects contacting existing franchisees to verify franchisor claims and culture
Validation is the step where prospects call or visit existing franchisees to get honest insights about the business, support, and profitability.
Question 6: Which FDD item contains audited financial statements of the franchisor?
- Item 19
- Item 20
- Item 21 (Correct answer)
- Item 22
Correct answer: Item 21
Item 21 requires franchisors to include their most recent three years of audited financial statements, providing prospects insight into the franchisor's financial health.
CFE CFE Franchise Development & Expansion 2
A franchisor is considering expanding internationally.
What is the most common entry strategy that involves partnering with a local entity to develop multiple units in a country?