Chapter 05
Small Business, Entrepreneurship, and Franchising
True / False Questions
1. Entrepreneurship is the process of creating and managing a business to achieve desired
objectives.
True
False
2. The entrepreneurship movement is declining because of technological advances.
True
False
3. One of the most significant drawbacks of small businesses is their inability to innovate
and to bring significant benefits to customers.
True
False
4. The Small Business Administration (SBA) is an organization formed and managed by
owners of small businesses.
True
False
5. Retailing attracts entrepreneurs because gaining experience and exposure in retailing is
relatively easy.
True
False
6. Industries such as wholesaling, services, and manufacturing are unattractive to
entrepreneurs because these fields tend to be relatively difficult to enter and require high
initial financing.
True
False
7. Small firms may be able to avoid competition from larger firms by focusing on narrow
market niches.
True
False
8. Small businesses often require more money to start and maintain than do large ones.
True
False
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9. Small businesses have a high success rate.
True
False
10. The principal immediate threats to small and mid-sized businesses include rising inflation,
energy and other supply shortages or cost escalations, and excessive household and/or
corporate debt.
True
False
11. When businesses suffer from seasonal variations in sales, they are more prone to
undercapitalization.
True
False
12. To support the growth of a small business, owners must be prepared to give up a certain
amount of direct authority.
True
False
13. A good business plan should be able to limit the business's flexibility and decision making
ability.
True
False
14. A business plan must be revised periodically to ensure that a firm's goals and strategies
adapt to changes in the environment.
True
False
15. In debt financing, entrepreneurs reinvest profits into the business or simply do not draw a
full salary.
True
False
16. Intrapreneurs are persons who agree to provide some funds for a new business in
exchange for an ownership interest or stock.
True
False
17. Raising money through venture capitalists requires a small-business owner to share the
profits of the business—and sometimes control, as well—with the investors.
True
False
18. Banks are the main suppliers of debt financing to small businesses.
True
False
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19. A drawback in franchising is the need for franchisees to strictly adhere to standardized
operations.
True
False
20. Industries such as travel, financial planning, and health care will lose their market
potential as baby boomers age.
True
False
21. Working remotely is more acceptable to the baby boomers segment of population than
the millennials.
True
False
22. In the recent years, free trade agreements and trade alliances are helping to create an
environment in which small businesses have fewer regulatory and legal barriers.
True
False
23. Big businesses can be effectively made to act small by making their operating units
function more like independent small businesses, each responsible for its profits, losses,
and resources.
True
False
24. Franchisers are individuals in large firms who take responsibility for the development of
innovations within the organizations.
True
False
25. Venture capitalists use company resources and time to develop a new product for the
company that hires them.
True
False
M ultiple Choice Questions
26. _____ is the process of creating and managing a business to achieve desired objectives.
A. Entrepreneurship
B. Bootstrapping
C. Intrapreneuship
D. Innovation
E. Brainstorming
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27. A _____ is best described as any independently owned and operated business that is not
dominant in its competitive area and does not employ more than 500 people.
A. publicly owned business
B. limited liability company
C. s mall business
D. p
ublicly traded company
E. for-profit corporation
28. A small business is any independently owned business that employs not more than _____
people.
A. 100
B. 500
C. 3
00
D. 2
00
E. 20
29. Vernon runs Buzz, his own event management company, which frequently organizes
large corporate events. Vernon has established a good reputation for organizing
corporate events with a fair degree of professionalism at reasonable costs. Vernon works
out of his old house with a staff of about 55 employees. Vernon's company is most likely
to be categorized as a(n):
A. multinational corporation.
B. limited liability company.
C. franchise.
D. p
ublic sector holding.
E. small business.
30. The Small Business Administration (SBA) is a(n):
A. body established by the U.S. Chamber of Commerce to encourage the intrapreneurial
spirit in small businesses.
B. independent agency of the federal government that offers managerial and financial
assistance to small businesses.
C. independent agency created under the GATT to protect small businesses against
competition from larger companies.
D. d
ivision of the federal government that is responsible for ensuring that newly formed
businesses adhere to the law.
E. U.S. Congressional agency that regulates the issue of stocks by small businesses.
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31. Which of the following is an advantage for small businesses that choose to enter the
retailing industry?
A. Retailing is relatively difficult field to gain entry.
B. Retailing requires a large capital investment in the initial stages.
C. R
etailing allows small business to focus on specific groups of consumers.
D. R
etailing requires sophisticated machinery and technical expertise.
E. Retailing suffers from heavy competition and losses only in the initial stages.
32. Which of the following reasons makes retailing an attractive industry for small
businesses?
A. Retailing eliminates the need for any entrepreneurial skills.
B. Retailing offers high barriers to entry.
C. R
etailing eliminates the need to engage in active interactions with the final customers.
D. R
etailing requires low initial financing.
E. Retailing limits a firm's need to focus on specific groups of consumers.
33. Which of the following best illustrates a small business operating in a retail industry as
opposed to wholesaling its products?
A. Janet bakes cakes and sells them to other restaurants and cafes in malls.
B. BC Inc. manufactures stationery and sells it in bulk to book shops and supermarkets.
C. P
ink Cult, an apparel company, sells its merchandise through OMG!.com.
D. N
eon Love Inc. imports candles and directly sells them to customers through kiosks.
E. Auto Line Inc. manufactures component parts of cars and sells them to automobile
companies.
34. Many service providers are considered retailers because they:
A. require a high initial start-up cost.
B. provide their services directly to ultimate consumers.
C. s ell their services from a single store location.
D. focus on large market segments and institutional buyers.
E. employ only a small number of people.
35. Which of the following traits will help entrepreneurs succeed?
A. Risk aversion
B. Intolerance
C. F
rugality
D. Impulsivity
E. Neuroticism
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36. One of the major reasons people want to own and operate their own business is to:
A. avoid the risk of competition.
B. be their own boss.
C. a
void multi-tasking.
D. r educe stress levels.
E. avoid direct responsibility of the operations.
37. Which of the following is an advantage of a small business?
A. Greater adaptability to changing market demands
B. Highly trained and competent staff
C. L
ow levels of stress in managing the business
D. D
iverse and large workforce
E. High success rates
38. Red Carpet Inc. is a small apparel store started by an aspiring designer. The store needs
to compete against larger, well-established multinational brands. Which of the following
strategies will most help Red Carpet Inc. avoid competition from larger firms?
A. Red Carpet Inc. should have multiple levels of management like the larger firms.
B. Red Carpet Inc. should target large market segments that the competitors serve.
C. R
ed Carpet Inc. should expand the scale of production to enjoy greater economies of
scale.
D. R
ed Carpet Inc. should start to work with customers only when the products are ready
for sale.
E. Red Carpet Inc. should focus on and target small market niches or product needs.
39. Small businesses usually have only one layer of management. Which of the following is
an implication of this?
A. Small businesses face a low risk of failure.
B. Small businesses have great flexibility to adapt to changing market conditions.
C. T
he decision-making process is lengthy in small businesses.
D. S
mall businesses have better access to managerial experience and skills than larger
firms.
E. Small business owners have a limited amount of direct authority.
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40. Which of the following is a disadvantage of small-business ownership?
A. High cost of formation
B. Bureaucratic decision-making process
C. A
bility to focus upon specific groups of customers
D. W
orries about employee problems or competition
E. Limited scope for innovation
41. Which of the following is a reason behind the failure of small businesses?
A. Overcapitalization
B. Reputation
C. M
anagerial experience
D. P
oor business concept
E. High costs of start-up
42. Carol has recently opened a restaurant in her neighborhood. Which of the following is
NOT likely to be a source of stress?
A. Competition
B. Reputation
C. R
ent increases
D. E
mployee issues
E. Changing market demand
43. _____ is best described as the lack of funds to operate a business normally.
A. Debt financing
B. Trade credit
C. F
ranchising
D. T
rade deficit
E. Undercapitalization
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44. Gerald started a business using the savings from his previous job. He planned to run his
business on the revenue generated from sales. However, a few months later, Gerald
found it difficult to pay his staff, rent, and other expenses. Seasonal sales and inability to
secure sufficient credit from local banks made it difficult for Gerald to operate the
business normally. Which of the following causes of small business failure does this
scenario best illustrate?
A. Undercapitalization
B. Trade credit
C. E
conomies of scale
D. D
ebt financing
E. Debt factoring
45. Which of the following is the shortest path to business failure?
A. Overcapitalization
B. Undercapitalization
C. R
ent increases
D. C
ompetition
E. Changing market demand
46. The principal immediate threats to small and mid-sized businesses include:
A. rapidly advancing technology.
B. rising entrepreneurial spirit.
C. r educing imports.
D. e
scalating costs.
E. increasing exports.
47. A business plan should do all of the following EXCEPT:
A. provide the rationale for the business.
B. include estimates of income and expenses.
C. e
stablish a strategy for acquiring sufficient funds.
D. include an analysis of the competition.
E. limit the business's flexibility and decision-making ability.
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48. Arnold approached a bank to get a loan for a business he planned to launch later in that
year. He explained his business idea and its capital requirements to the bank manager.
The manager listened to the plan and asked Arnold to provide a formal document that
included a rationale for the business, an explanation of how it will achieve its goals, an
analysis of the competition, and estimates of income and expenses among other
information. Which of the following documents does the bank expect from Arnold in this
scenario?
A. A business plan
B. A cash flow statement
C. A
promissory note
D. A
balance sheet
E. A marketing plan
49. In the process of starting a business, the step that immediately succeeds the
development of a business plan involves:
A. organizing resources like labor and supplies.
B. developing some general business ideas.
C. d
eciding an appropriate legal form of business ownership.
D. p
romoting the business to the customers.
E. filing for tax returns for the business with the Internal Revenue Service.
50. To make profits from a small business, the owner must first provide or obtain _____ to
start the business and keep it running smoothly.
A. products
B. employees
C. p
rofits
D. s upplies
E. capital
51. Which of the following is NOT a source of equity financing?
A. Reinvesting profits into the business
B. Selling personal assets to raise funds
C. B
ringing in useful personal assets such as a computer into the business
D. S
ecuring long-term loans from a family member
E. Selling stock in the business to family members or friends
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52. Walter sold a piece of land he inherited from his grandparents and started a business with
the proceeds. Which of the following sources has Walter used to raise funds for his
business?
A. Equity financing
B. Debt financing
C. V
enture capital
D. Initial public offering
E. Angel Investment
53. Janice works in a factory that manufactures decorative accessories for office spaces,
hotels, and designer homes. She wants to start her own business because she believes
that the market for decorative products has a great growth potential. However, she does
not want to depend on anyone else for the procuring the initial capital and would like to
raise the amount herself. In this scenario, which of the following methods would Janice
adopt to raise funds through equity financing?
A. Janice would secure a mortgage from a family member or friend.
B. Janice would secure a loan from the Small Business Administration (SBA).
C. J anice would ask for a line of credit from her previous bank.
D. J anice would invest her savings in the new business.
E. Janice would ask suppliers for a longer trade credit.
54. Jacob and Harry are business partners in a company that manufactures portable solar
panels. They initially started the business with their savings. However, now the company
plans to expand its operations and the required amount of capital cannot be raised
through savings or by reinvesting profits. Thus, the partners have decided to sell stock in
their business to family members, friends, and employees. Which of the following sources
of capital have Jacob and Harry planned to use for the expansion of their business?
A. Debt financing
B. Bootstrapping
C. E
quity financing
D. M
ortgaging
E. Factoring
55. Persons or organizations that agree to provide some funds for a new business in
exchange for ownership interest or stock are called ____.
A. intrapreneurs
B. category captains
C. v enture capitalists
D. trade debtors
E. franchisers
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56. Securing a mortgage from a bank for a new business venture is an example of:
A. equity financing.
B. venture capitalism.
C. d
ebt financing.
D. trade credits.
E. collaterals.
57. When an entrepreneur takes out a loan from a bank, the bank will require him to put up
_____, which is a financial interest in the property or fixtures of the business, to guarantee
payment of the loan.
A. collateral
B. venture capital
C. trade credit
D. b
usiness plan
E. cash flow statement
58. Lara, a single mother, borrowed some capital for her business from Women Progress
Council (WPC) at an extremely low rate of interest. Which of the following forms of
funding a new small business does this scenario best illustrate?
A. Trade credit
B. Equity financing
C. V
enture capital
D. D
ebt financing
E. Crowdsourcing
59. Andrew, a pharmacist, realized that he should stock extra supplies of a particular
medicine to respond to an outbreak of a particular infection in the city. Lacking sufficient
capital to purchase the extra inventory, he turned to his bank and asked to borrow a
predetermined sum of money. Which of the following sources of funding does this
scenario best illustrate?
A. Trade credit
B. Initial public offering
C. V
enture capital
D. E
quity financing
E. Line of credit
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60. A license to sell another's products or to use another's name in business, or both, is
called a ____.
A. franchise
B. cartel
C. c ollateral
D. m
ortgage
E. collusion
61. Since Eva Carl has decided to use her savings to purchase the rights to own and operate
a McDonald's fast-food restaurant rather than starting her own restaurant, she is probably
a(n) ____.
A. trade creditor
B. franchisee
C. franchiser
D. intrapreneur
E. venture capitalist
62. Nathan started the first outlet of Dynamix Gym in New York City in 1995. The business
expanded over time, and Nathan became the owner of a chain of gyms in New York
State. Though the business had potential to expand outside New York, Nathan did not
want to take the risk or responsibility. Hence, he decided to sell the license to own and
operate gyms in the name of Dynamix Gym to independent owners. In return, he charged
them an initial fee and a small share in the monthly profits. In this scenario, Nathan is a(n)
____.
A. franchisee
B. intrapreneur
C. a
ngel investor
D. franchiser
E. venture capitalist
63. Which of the following statements accurately brings out the difference between
franchising and building an independent business from scratch?
A. The time required to set up an independent business is much lower than obtaining a
franchise.
B. A franchise outlet often reaches the break-even point faster than an independent
business would.
C. A
franchisee would experience more flexibility in decision making than the owner of an
independent business.
D. T
he quality of goods and services needs to be more standardized and uniform in
independent business than in franchises.
E. Access to managerial and financial assistance is more limited in franchises than in
independent businesses.
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64. Which of the following is an advantage that purchasers of a popular franchise
experience?
A. They get access to the already established brand name or brand equity.
B. They have great flexibility to make decisions for their individual franchise outlets.
C. T
hey can enjoy their total profits without having to share anything with the franchisers.
D. T
hey can easily add or delete a good or service from the existing product line.
E. They are free to vary their operational processes based on their needs and constraints.
65. One of the main drawbacks of franchising is that it requires the franchisee to:
A. invest a lot of time and effort in setting up the business.
B. take sole responsibility for all decisions in the business.
C. s hare the profits of the business with the franchiser.
D. b
uild the brand appeal for the franchise outlet on his or her own.
E. invest considerable capital in national and local advertising programs.
66. Paul has recently quit his job as an investment banker. He plans to open a restaurant. He
has two options: he can either start his own new restaurant from scratch or purchase a
franchise from an already established restaurant or fast food chain. His wife, Lisa,
supports the former plan. Which of the following statements strengthens the argument in
favor of Lisa's choice of opening a restaurant independently?
A. It is easier and faster to build a business from scratch.
B. It is easier to reach the break-even point through an independent business.
C. It is more difficult to attract customers in a franchise business as the entrepreneur has
to personally build the brand appeal.
D. It is easier and more flexible to make and execute decisions in an independent
business.
E. It is easier to succeed in a business built from scratch as the products and the
business format are already proven.
67. Millennials number around 75 million and represent a huge business opportunity in the
United States. Which of the following is a defining feature of the millennials?
A. Baby boomers above the age 50
B. First generation immigrants
C. P
eople born at the turn of the millennium between 1999 and 2001
D. P
eople from immigrant communities who migrated to U.S. between 1946 and 1964
E. People born between 1977 and 1994
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68. Sally is a human resource manager at a company. A survey of the company's employees
revealed that more than 80 percent of the employees belonged to the demographic
segment Generation Y. In this scenario, which of the following HR strategies should Sally
implement in order to best serve the needs of the employees?
A. Sally should solely use financial rewards to motivate the employees to improve their
productivity.
B. Sally should keep the training sessions highly formal with no scope for entertainment.
C. S
ally should restrict the employees from using work from home or telecommuting
options.
D. S
ally should avoid giving regular, direct feedback to the employees.
E. Sally should use recognition and advancement as the driving forces to motivate
employees.
69. Which of the following demographic segments should small retailers specializing in ethnic
products and small service providers target?
A. Immigrants
B. Echo boomers
C. B
aby boomers
D. G
eneration X
E. Drivers
70. Which of the following demographic trends has made health care and financial planning
industries attractive for small businesses in the United States?
A. Decreasing population of millennials
B. Increasing income among generation X
C. A
ging baby boomers who are wealthy
D. R
educing entrepreneurial spirit among young generations
E. Increasing imports into the economy
71. Which of the following is an implication of technological advances to small businesses?
A. It fails to make any significant changes as small businesses cannot afford to use
sophisticated technology in their operations.
B. It reduces a small business's ability to adapt to changing trends and market demands.
C. It increases the ratio of baby boomers as employees in small businesses.
D. It provides new opportunities for small businesses to expand their operations abroad.
E. It reduces a small company's ability to customize their services and products.
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72. Norton is a human resource manager at a large multinational company. After a drastic
drop in revenue, his company is thinking of ways to correct the situation. At a meeting
with the top management, the CEO suggested that 20 percent of the employees should
be eliminated. This move would help the company cut costs and continue functioning on
the current projects. In this scenario, which of the following strategies is this MNC
planning to use?
A. Debt financing
B. Intrapreneruship
C. C
rowdsourcing
D. F
ranchising
E. Downsizing
73. Downsizing is an effective way to:
A. gain the advantages of small businesses.
B. increase organizational tasks.
C. r educe entrepreneurial spirit among employees.
D. increase the management layers.
E. gain employee trust.
74. Which of the following statements accurately describes intrapreneurs?
A. Employees who become a part of a company's board of directors through internal
promotions are referred to as intrapreneurs.
B. Entrepreneurs who sell the rights to use their products to independent owners are
intrapreneurs.
C. E
ntrepreneurs who are involved in international business are referred to as
intrapreneurs.
D. Independent investors who help a company raise capital through internal financing are
intrapreneurs.
E. Individuals in large firms who take responsibility for the development of innovations
within the organizations are intrapreneurs.
75. Which of the following is an ineffective practice in making big businesses act small?
A. Encouraging a spirit of entrepreneurship within the organization
B. Increasing the layers of management within the organization
C. D
ownsizing to reduce work tasks
D. K
eeping the growth vision long term
E. Focusing on current customers rather than looking for new customers
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76. George is an employee at a company that provides information technology solutions to
other firms. He has been developing a new smart phone application from the resources of
the company. In this scenario, George best illustrates a(n) ____.
A. franchiser
B. venture capitalist
C. intrapreneur
D. e
ntrepreneur
E. trade creditor
Essay Questions
77. What is meant by a small business? What is the role of Small Business Administration
(SBA) in managing small business?
78. How do small businesses contribute to the American economy?
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79. Why are the retailing and wholesaling industries attractive for small businesses?
80. Why is the service industry suitable for small businesses?
81. How are small businesses more flexible than larger ones in adapting to changing market
demands?
82. How do small firms gain by focusing on narrow market niches?
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83. Why do small businesses have a high failure rate?
84. What is undercapitalization? How does it contribute to the failure of a small business?
85. What is a business plan and why is it important?
86. What is equity financing?
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87. Kleen, is a revolutionary water purifying system with a built-in monitor that constantly
updates the user with statistics on the quality of water. Akido Enterprises, a small
company that designed the product, is now looking for sources of funding to develop this
idea on a larger scale. The team that developed Kleen is sure that the product has a very
good scope for use in institutions like schools and hospitals as well as for household use.
The team that developed Kleen is looking for people who have the financial resources
and believe in the market potential that this product has. Describe any one source of
funding that would be appropriate for this purpose.
88. Describe debt financing.
89. Describe the terms "collateral" and "mortgage" in the context of debt financing.
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90. Discuss trade credit and line of credit as sources of debt financing.
91. What is franchising? Discuss its advantages and disadvantages.
92. How does the Small Business Administration (SBA) help small businesses?
93. What demographic trends will have the most impact on small business in the future?
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94. How have advances in technology opened up many new markets to small businesses?
95. How can big companies be made to act small?
96. Kiersey is one of the larger players in the market for electronic gadgets. Over the last
three financial quarters, however, its market share has dwindled rapidly and the company
is not able to cut costs or develop products that are very different from its previous
offerings. The media reports are attributing this failure to Kiersey's lack of innovation.
Suggest any two steps Kiersey can take to rectify the current situation.
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