CFC Franchise Financial Analysis & Investment Evaluation Flashcards
6 cards from real CFC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 CFC Franchise Financial Analysis & Investment Evaluation flashcards as text
What is the key difference between a franchise fee and ongoing royalties?
Answer: The franchise fee is a one-time upfront payment for the right to operate; royalties are recurring payments based on sales
The franchise fee is a one-time payment granting the right to operate under the brand, while royalties are recurring fees (usually a percentage of gross sales) paid throughout the term.
When analyzing a franchise investment's return, what does 'payback period' measure?
Answer: The length of time needed for cumulative profits to equal the initial investment
The payback period measures how many years of cumulative net cash flow or profit are needed to recover the total initial investment.
Which of the following best describes 'working capital' in a franchise context?
Answer: Current assets minus current liabilities, representing funds available for daily operations
Working capital is current assets minus current liabilities and represents the liquidity available to fund day-to-day business operations.
A CFC client is concerned about cash flow in the first year of a new franchise. What financial reserve is typically recommended to cover operating expenses?
Answer: Three to six months of operating expenses
Industry best practice recommends that new franchisees maintain three to six months of operating expenses as a cash reserve to weather the ramp-up period.
What is the purpose of a 'pro forma' financial statement in franchise investment evaluation?
Answer: It is a forward-looking projected financial statement used to estimate future performance
A pro forma is a projected (forward-looking) financial statement that estimates revenues, expenses, and profitability based on assumptions about future performance.
Which term describes the total amount a franchisee must pay to open a location, including franchise fee, equipment, leasehold improvements, and working capital?
Answer: Total initial investment
The total initial investment encompasses all costs required to open and operate the franchise through the initial ramp-up period, as disclosed in Item 7 of the FDD.