ANS: F This information will be a primary source but more information should be obtained. The information from the franchisor is being used to promote the franchise. PTS: 1 DIF: Difficulty: Easy REF: p. 102 OBJ: LO: 4-3b NAT: BUSPROG: Analytic STA: DISC: Dynamics KEY: Bloom’s: Analysis 12. Jarrod is reading a detailed statement of the franchisor’s finances, experience, size, and involvement in litigation. Jarrod is reading a Franchise Disclosure Document. ANS: T PTS: 1 DIF: Difficulty: Easy REF: p. 103 OBJ: LO: 4-2b NAT: BUSPROG: Analytic KEY: Bloom’s: Knowledge | Bloom’s: Comprehension 13. As of 2008, the Federal Trade Commission’ s Franchise Rule prescribes that franchisors must disclose to prospective franchisees information such as bankruptcies, business experience of the principals, and litigation in which the firm is involved. ANS: T PTS: 1 DIF: Difficulty: Moderate REF: p. 104 OBJ: LO: 4-3c NAT: BUSPROG: Analytic STA: DISC: Ethical and Legal KEY: Bloom’s: Knowledge 14. Conducting a thorough due diligence should always be accomplished if purchasing an existing corporation or franchise, but is unnecessary if acquiring a sole proprietorship.

ANS: F Due diligence is needed no matter what corporate format the prospective business has. PTS: 1 DIF: Difficulty: Easy REF: p. 108 OBJ: LO: 4-4c NAT: BUSPROG: Analytic STA: DISC: Finance KEY: Bloom’s: Comprehension 15. As part of the valuation process, a buyer should scrutinize the seller's balance sheet to see whether asset book values are realistic. ANS: T PTS: 1 DIF: Difficulty: Easy REF: p. 110 OBJ: LO: 4-4d NAT: BUSPROG: Analytic STA: DISC: Finance KEY: Bloom’s: Analysis | Bloom’s: Comprehension 16. A nondisclosure agreement signed by a prospective buyer shows the seller that the buyer intends to purchase the business. ANS: F A nondisclosure agreement is a contract stating the buyer promises the seller that he or she will not reveal confidential information or violate the seller’s trust. PTS: 1 DIF: Difficulty: Moderate REF: p. 110 OBJ: LO: 4-4c NAT: BUSPROG: Analytic STA: DISC: Ethical and Legal KEY: Bloom’s: Knowledge | Bloom’s: Comprehension 17. Financial statements can mislead a potential purchaser trying to develop an accurate business valuation. ANS: T PTS: 1 DIF: Difficulty: Moderate REF: p. 110 OBJ: LO: 4-4c NAT: BUSPROG: Analytic STA: DISC: Finance KEY: Bloom’s: Analysis | Bloom’s: Comprehension 18. The buyer of an existing business typically acquires its personnel, inventories, physical facilities, established banking connections, and ongoing relationships with trade suppliers. ANS: T PTS: 1 DIF: Difficulty: Easy REF: p. 111 OBJ: LO: 4-4f NAT: BUSPROG: Analytic STA: DISC: Value CreationKEY: Bloom’s: Knowledge 19. A wise buyer will also evaluate the legal commitments of an existing business. ANS: T Although only indirectly related to a firm's future cash flows and financial position, legal considerations can be an important nonquantitative factor in valuing a business.