CFE CFE Franchise Development & Expansion 1 — Questions and Answers
Question 1: What document provides a prospective franchisee with all legally required disclosures about a franchise opportunity in the US?
- Franchise Disclosure Document (FDD) (Correct answer)
- Franchise Agreement
- Operations Manual
- Offering Circular
Correct answer: Franchise Disclosure Document (FDD)
The Franchise Disclosure Document (FDD) is the federally mandated document that franchisors must provide to prospects at least 14 days before signing any agreement.
Question 2: Which FDD item discloses the estimated initial investment range a new franchisee should expect?
- Item 5
- Item 7 (Correct answer)
- Item 10
- Item 19
Correct answer: Item 7
Item 7 of the FDD details the estimated initial investment, covering all costs a franchisee will incur before opening.
Question 3: In US franchise law, how many calendar days before signing must a franchisor deliver the FDD to a prospect?
- 7 days
- 10 days
- 14 days (Correct answer)
- 30 days
Correct answer: 14 days
The FTC Franchise Rule requires franchisors to provide the FDD at least 14 calendar days before the prospective franchisee signs any agreement or pays any money.
Question 4: What is the primary purpose of awarding protected or exclusive territories in a franchise agreement?
- To limit the franchisor's expansion plans
- To prevent encroachment and protect franchisee investment (Correct answer)
- To comply with FTC regulations
- To establish royalty rates
Correct answer: To prevent encroachment and protect franchisee investment
Protected territories prevent the franchisor from opening competing units or granting other franchises that could cannibalize the franchisee's sales.
Question 5: Which metric is most commonly used to evaluate the success of a franchisor's franchise development efforts?
- Total royalty revenue
- Franchisee satisfaction score
- Number of qualified franchisee leads converted to signed agreements (Correct answer)
- System-wide gross sales
Correct answer: Number of qualified franchisee leads converted to signed agreements
Lead-to-agreement conversion rate directly measures the effectiveness of the development process from prospect identification through signing.
Question 6: What is 'churning' in the context of franchise development and why is it problematic?
- Rapid menu changes that confuse customers
- Re-selling failed franchise units repeatedly without addressing root causes (Correct answer)
- High employee turnover at the franchisor level
- Excessive royalty increases
Correct answer: Re-selling failed franchise units repeatedly without addressing root causes
Churning refers to a franchisor repeatedly reselling struggling or failed units without fixing systemic issues, which exploits franchisees and damages brand credibility.
CFE CFE Franchise Development & Expansion 1
What document provides a prospective franchisee with all legally required disclosures about a franchise opportunity in the US?