Layman's Guide to the
Uniform Franchise Offering Circular (UFOC)
by Patricia Schaefer
The Uniform Franchise Offering Circular (UFOC) is the disclosure document of choice for the vast majority of franchisors. It is also enormously useful for prospective franchisees as an introduction to a franchise system, and should be used as the foundation for inquiries into that system.
Franchise law requires that a franchisor provide a copy of the disclosure document to each prospective buyer at the earlier of either (1) the first personal face-to-face meeting, or, (2) 10 business days prior to the contract signing or payment of monies relating to the franchise relationship.
Although the Federal Trade Commission (FTC) requires franchisors to provide each franchisee with a franchise disclosure document, it is important to note that the FTC does not actually review the content of the UFOC franchisors submit to franchisees. It is up to the prospective franchisee, and his or her attorney and accountant, to check the veracity of the information provided.
Brief history of the UFOC
The FTC Franchise Rule, formally titled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures," was the predecessor to the UFOC. Taking effect in October of 1979, it was designed to protect potential franchisees in their franchise investments by providing them with essential and relevant disclosures about the franchise opportunity; thus, making the franchise investment a fully informed decision. This was the first regulation of franchising at the Federal level.
Fourteen years after the Franchise Rule took effect -- in April of 1993 -- the North American Securities Administrators Association (NASAA) adopted the UFOC Guidelines as the recommended format for franchise disclosure documents at the state level. In December of 1993, the FTC approved the use of the UFOC format as an alternative to that of the FTC's Franchise Rule. Since then, most franchisors have chosen the UFOC format; one reason being that a number of states do not accept the Franchise Rule format for franchise disclosure.
The Franchise Rule can be found at: http://www.ftc.gov/bcp/franchise/16cfr436.htm, and guidelines for preparing UFOC disclosures are available at: http://www.nasaa.org/content/Files/
Don't let the UFOC intimidate you
The UFOC is enormously helpful to prospective franchisees and it important to carefully review and understand it before buying a franchise. Depending on the individual franchisor, the length of the UFOC varies from about 75 to 200 pages long. However, all UFOCs are required by law to contain 23 key items. Franchise disclosure documents must also be written in "plain English."
Don't try to absorb the UFOC's contents in one sitting; first do a cursory review -- then, a day or so later with a pen and pad in hand, carefully read and study it with the intent of annotating any questions, comments or concerns you may have about any of its contents. Upon performing your own research -- and the absence of any "red flags" -- your final assessment of the UFOC should be with a qualified franchise attorney and accountant.
Remember, although the size of the document can feel overwhelming, don't make the mistake of allowing this wealth of information to go unexamined or unchecked.
The 23 Items
(#1) The Franchisor, Its Predecessors and Affiliates
Information about the franchisor, any predecessors and its affiliates. Disclosure includes: a description of the business of the franchisor; previous business experience of the franchisor, its predecessors and affiliates; the business to be operated by the franchisees; and the general market for products or services offered by franchisees.
Keep in mind that investing in a brand new or inexperienced franchisor may be a greater risk than investing in a long-established and successful franchise.
(#2) Business Experience
Information about the past five years' work experience of all executives of the franchise system (i.e., officers, trustees, directors, and managers) including their main occupations and past employers.
Consider the executives' experience in managing a franchise system as well as their business experience. Also consider how long these individuals have been with the franchise.
Disclosure of prior (up to 10 years) or present litigation. This includes the franchisor and anyone affiliated with it; i.e., predecessors, executives and franchise brokers
If you do find a number of actions, particularly if franchisees have sued the franchise, be sure to bring to your attorney's attention for investigation.
Disclosure of any bankruptcy that has occurred within the past ten years involving the franchise, its affiliates or predecessors.
Knowledge of any bankruptcy issues will assist in your assessment of the franchisor's financial stability and strength. You'll want to invest in a franchise that will be financially sound and able to deliver the contracted support services.
(#5) Initial Franchise Fee
Information on all initial fees to the franchisor including the initial franchise fee.
Be aware that certain initial fees may be non-refundable.
(#6) Other Fees
Information on other fees that are paid to the franchisor; i.e., ongoing royalty payments and advertising fees.
Franchisees are sometimes unhappy when they find out how their advertising fees will be spent by the franchisor. Since you often must contribute a percentage of your business income to advertising, find out just how and on what these funds will be used. You'll want to be sure your franchise and territory will benefit.
(#7) Initial Investment
Now in a useful chart format, this disclosure summarizes the franchisor's estimate of the typical investment costs of establishing a new franchise in their system.
This key information is enormously helpful to you and your accountant in preparing your business plan or obtaining financing. Be sure to note that this is an estimate of typical investment costs; there may be other undisclosed costs.
The Federal Trade Commission suggests that prospective franchisees look for the following checklist items when reviewing the franchisor's investment costs: continuing royalty payments; advertising payments, both to local and national advertising funds; grand opening or other initial business promotion; business or operating licenses; product or service supply costs; real estate and leasehold improvements; discretionary equipment, such as a computer system or business alarm system; training; legal fees; financial and accounting advice; insurance; compliance with local ordinances such as zoning, waste removal and fire and other safety codes; health insurance; and employee salaries and benefits. Also factor in up to two years of personal living expenses as it may take several months or longer for your business to start making a profit.
Talk to current franchisees and compare your estimates with their actual initial costs. Also speak with franchisees of competing franchise systems; you may be able to get a better deal with a competing franchisor.
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Copyright 2006, Attard Communications, Inc.