Q.1 What is a franchise in business law?
A government-issued license to start a business
A legal agreement allowing one party to use another's brand and business model
A type of partnership between two companies
An informal business collaboration without contracts
Explanation - A franchise is a contractual relationship where the franchisor grants the franchisee the right to operate under its brand and system.
Correct answer is: A legal agreement allowing one party to use another's brand and business model
Q.2 Which document is essential before starting a franchise?
Memorandum of Association
Franchise Disclosure Document
Bill of Sale
Non-Disclosure Agreement
Explanation - The Franchise Disclosure Document (FDD) provides important information about the franchisor, the franchise system, and the terms of the franchise agreement.
Correct answer is: Franchise Disclosure Document
Q.3 Who typically pays royalty fees in a franchise agreement?
Franchisor
Franchisee
Government
Suppliers
Explanation - The franchisee pays royalty fees to the franchisor, usually as a percentage of revenue or fixed fee, for using the brand and system.
Correct answer is: Franchisee
Q.4 Which of the following is a common term in franchise agreements?
Termination clause
Dividend declaration
Patent licensing
Shareholder voting rights
Explanation - Franchise agreements often include a termination clause specifying conditions under which the agreement can be ended.
Correct answer is: Termination clause
Q.5 A franchisee has the right to:
Change the brand's logo freely
Operate under the franchisor’s trademark
Sell the franchise to anyone without approval
Terminate the contract at any time without notice
Explanation - The franchisee is granted rights to use the franchisor's trademarks and branding under agreed conditions.
Correct answer is: Operate under the franchisor’s trademark
Q.6 Franchise law ensures:
Protection of intellectual property
Franchisee receives free products
Unlimited profit for franchisee
Government control of pricing
Explanation - Franchise law protects the franchisor's intellectual property and ensures legal clarity in the franchise relationship.
Correct answer is: Protection of intellectual property
Q.7 Which of the following is NOT a type of franchise?
Business format franchise
Product distribution franchise
Management franchise
Government franchise
Explanation - Common franchise types include business format, product distribution, and management franchises, not government franchises.
Correct answer is: Government franchise
Q.8 The initial fee paid to a franchisor is called:
Royalty fee
Franchise fee
Service charge
Subscription fee
Explanation - The franchise fee is a one-time payment made by the franchisee to the franchisor for entering the franchise system.
Correct answer is: Franchise fee
Q.9 Territorial rights in a franchise agreement mean:
Franchisee can operate anywhere in the country
Franchisee is limited to a specific geographical area
Franchisor owns the land
Government allocates territories
Explanation - Territorial rights restrict the franchisee to a certain area to avoid competition among franchisees.
Correct answer is: Franchisee is limited to a specific geographical area
Q.10 Which law primarily governs franchising in the U.S.?
Uniform Commercial Code (UCC)
Federal Trade Commission (FTC) Franchise Rule
Sherman Antitrust Act
Securities Exchange Act
Explanation - The FTC Franchise Rule regulates the disclosure requirements for franchisors in the United States.
Correct answer is: Federal Trade Commission (FTC) Franchise Rule
Q.11 What is the main purpose of royalty fees in franchising?
To fund government taxes
To compensate franchisor for ongoing support and brand use
To pay suppliers
To invest in competitor businesses
Explanation - Royalty fees compensate the franchisor for the use of their brand, system, and support services.
Correct answer is: To compensate franchisor for ongoing support and brand use
Q.12 Which of the following may be considered a franchise violation?
Paying royalties on time
Using the brand outside the authorized territory
Following marketing guidelines
Attending franchisor training programs
Explanation - Operating outside the agreed territory can violate the franchise agreement and result in legal action.
Correct answer is: Using the brand outside the authorized territory
Q.13 Franchising is most suitable for businesses that:
Have a well-known brand and replicable system
Operate only online
Depend on one location only
Are new and untested
Explanation - Franchising works best for businesses that have a proven, replicable business model and recognizable brand.
Correct answer is: Have a well-known brand and replicable system
Q.14 Which of the following is a risk for franchisees?
Unlimited control over brand
High upfront investment and ongoing fees
No contract obligations
Government subsidies
Explanation - Franchisees face financial risks, including initial fees, royalties, and investments to maintain the franchise.
Correct answer is: High upfront investment and ongoing fees
Q.15 Which is true about franchise termination?
Franchise agreements can never be terminated
Termination is allowed under conditions specified in the contract
Franchisee can terminate anytime without notice
Government decides termination
Explanation - Termination clauses in franchise agreements define legal conditions under which either party can end the franchise.
Correct answer is: Termination is allowed under conditions specified in the contract
Q.16 What role does the franchisor play?
Provides branding, training, and operational support
Pays royalties to franchisee
Operates the franchise directly
Regulates government compliance
Explanation - Franchisors supply the brand, operational systems, and ongoing guidance to franchisees.
Correct answer is: Provides branding, training, and operational support
Q.17 In a product distribution franchise, the franchisee:
Operates a standardized business format
Sells the franchisor’s products only
Designs their own products
Manages the franchisor’s headquarters
Explanation - In product distribution franchising, the franchisee focuses on distributing and selling the franchisor's products.
Correct answer is: Sells the franchisor’s products only
Q.18 What is the legal effect of a signed franchise agreement?
It is a binding contract enforceable by law
It is a mere suggestion
It requires no signatures to be valid
It is optional for both parties
Explanation - Once signed, a franchise agreement is legally binding, outlining rights and obligations of both parties.
Correct answer is: It is a binding contract enforceable by law
Q.19 Which is considered an advantage for franchisors?
Rapid expansion with lower capital investment
Direct control of every location
Reduced legal obligations
No revenue from franchise fees
Explanation - Franchisors can expand their brand quickly without significant capital, relying on franchisee investment.
Correct answer is: Rapid expansion with lower capital investment
Q.20 Exclusive territory grants in franchises aim to:
Prevent franchisee competition within the territory
Allow multiple franchisees to compete freely
Limit franchisor’s profits
Increase government revenue
Explanation - Exclusive territories protect franchisees from competition by other franchisees in the same area.
Correct answer is: Prevent franchisee competition within the territory
Q.21 Franchise agreements often require franchisees to:
Follow brand standards and operational procedures
Set their own independent brand
Ignore franchisor training
Operate without financial records
Explanation - Franchisees must comply with franchisor guidelines to maintain brand consistency and quality.
Correct answer is: Follow brand standards and operational procedures
Q.22 Which term describes the payment structure where a percentage of revenue goes to the franchisor?
Initial fee
Royalty fee
Management fee
Equity share
Explanation - Royalty fees are ongoing payments based on revenue, compensating the franchisor for brand and support.
Correct answer is: Royalty fee
Q.23 Which government agency regulates franchise disclosure in the United States?
Federal Trade Commission (FTC)
Department of Commerce
Securities and Exchange Commission (SEC)
Federal Communications Commission (FCC)
Explanation - The FTC ensures franchisors provide accurate disclosures to prospective franchisees under the Franchise Rule.
Correct answer is: Federal Trade Commission (FTC)
Q.24 Which of the following is a limitation of a franchise?
Franchisee has full autonomy over brand
Franchisee must follow operational rules
Franchisor cannot provide support
Franchise is exempt from legal contracts
Explanation - Franchisees are limited by the franchisor’s operational rules to maintain consistency across the brand.
Correct answer is: Franchisee must follow operational rules