Layman's Guide to the
Uniform Franchise Offering Circular (UFOC)
by Patricia Schaefer
Continued from Page 1
#8) Restrictions on Sources of Products and Services
This item lets you know if you are required to buy or lease products or services from the franchisor or other designated authorized suppliers, and provides details of the specific restrictions imposed.
Supply arrangements are a key aspect of running a successful franchise, so review this section carefully. If it looks like a significant portion of the franchisor's revenue comes from franchisee purchases, find out from current franchisees if products are priced fairly and efficiently delivered. You don't want a situation where the franchisor's unfair profit is your unfortunate loss.
In optimal circumstances, the combined purchasing power of a franchise system can lead to significant savings. On the other hand, understand that these restrictions may limit your ability to cost-effectively operate your outlet.
(#9) Franchisee's Obligations
This item lists in chart format the franchisee's obligations in 24 different categories: These categories include: site selection and acquisition, initial training, opening, compliance with system standards, territorial development, insurance, records and reports, and dispute resolution.
This item is simply a cross-reference chart showing where each franchisee obligation is addressed in the narrative items and the franchise agreement.
(#10) Financing
Describes and details any financing offered to the franchisee by the franchisor or affiliated third party.
A small number of sophisticated franchisors do offer in-house financing. A larger percentage have special arrangements for franchisee financing with particular banks or other lending institutions.
(#11) Franchisor's Obligations
Typically the longest and most illuminating section of the UFOC, it describes in "plain English" the franchisor's principal obligations under the franchise agreement. This includes a list of (1) services the franchisor is obligated to provide before the opening of the franchisee's business and (2) the services the franchisor is obligated to provide after the opening. The remainder of this item includes detailed information on the franchisor's advertising program, any required computer system or electronic cash registers, the operations manual, site selection criteria and procedures, and the franchisor's training and assistance program.
It will be apparent as you read this item if the franchisor is short or long on contractual obligations.
Keep in mind that a key reason for investing in a franchise is the training and assistance provided. If you suspect the training is insufficient for your needs, you may want to consider another franchise opportunity.
(#12) Territory
This section lays out your territorial rights and restrictions. It includes disclosure on exclusive territory granted, whether or not the franchisor can open another franchise within your geographical area, conditions for relocating the franchise, and any sales quotas imposed on franchisees.
The territorial descriptions in this item can be complicated and too often misunderstood. Read it carefully and be sure to go over with your attorney. Be sure to understand what rights you have both inside and outside of any designated territory.
It is important to note that even the best territorial rights within a franchise system won't completely prevent competition in your territory. For example, a competing franchise concept could very well open up its doors of business right across the street.
(#13) Trademarks
Discloses information on who owns the trademarks of the franchise, how each trademark is protected, and how the franchisee will be allowed to use the trademarks.
For each trademark, find out if it is federally registered or if registration is still pending. Any trademarks listed by the franchisor should be registered to insure your right to continue using them in the future.
(14) Patents, Copyrights and Proprietary Information
The franchisor must disclose in this section information about any patents, copyrights, confidential information, or trade secrets relating to the franchise.
Be sure to take the protection of intellectual property seriously. As a franchisee, you must do you part in ensuring that you do not violate any trusts placed in you; i.e., divulging trade secrets or confidential information could have dire consequences.
(#15) Obligation to Participate in the Actual Operation of the Franchise
Information on whether or not the franchisee is required to personally participate in the operation of the franchise.
If the franchisee is not required to personally participate in the business operation, be sure the review the information on the on-site manager. This should include training requirements and any restrictions the franchisee must place on its manager.
(#16) Restrictions on What the Franchisee May Sell
Describes the product line, and discloses any restrictions for other products or services you may be allowed to offer your customers
This type of control can diminish your abilitiy to exercise your own business judgment; i.e., as a restaurant franchise owner, you may not be able to delete menu items that are unpopular or add items you feel would be popular.
(#17) Renewal, Termination, Transfer and Dispute Resolution
Disclosure of the required conditions for renewal, termination, and transfer of the franchise. Also provides information on the approved methods for resolving conflicts and disputes with the franchisor.
Now in a useful format, this chart cross-references and summarizes provisions of the franchise agreement on these topics.
(#18) Public Figures
If a franchisor uses a public figure for endorsing the franchise, or uses a famous person in the franchise's name or logo, it must disclose information on the compensation paid to the public figure, the amount of the public figure's investment in the franchise, and the public figure's involvement in the management of the franchisor.
(#19) Earnings Claims
The FTC does not require franchisors to provide earnings claims to franchisees. If a franchisor chooses to do so, there are strict rules as to the information provided in earnings claims. Because of this, only about 25% of franchisors include them.
If this information is provided, read it carefully and share this information with your accountant for a clearer understanding. If the information is not provided, try to find out why. It may in fact be because the actual earnings of franchisees is less than desirable. Whether or not the franchisor provides earnings information, be sure to query franchisees in the system about their sales and profits.
(#20) List of Outlets
In this item, the franchisor must disclose information on: the number of franchise units; name, address and telephone numbers of all franchisees (up to 100); number of new franchises predicted for the upcoming year; and information and contact information on franchisees who have ceased to be franchisees.
The information provided covers from three years back to projections to one year ahead. This should give you a sense of the direction of the franchise. Again, talk to as many current franchisees as you can. A large and quick expansion of a franchise in terms of number of outlets is not always the best for franchisees; i.e., support services may suffer.
(#21) Financial statements
Financial statements audited by an independent CPA must be provided. They include: (1) for the last three fiscal years -- cash flow statements, statements of operations, and statements of stockholders' equity; and (2) for the last two fiscal years -- balance sheets.
These statements can be difficult to understand, so it is critically important to have your accountant review and evaluate these financial statements in order to ascertain the financial strength or weakness of the franchisor.
(#22) Contracts
This section provides copies of all contracts franchisees will be expected to sign if they choose to buy the franchise.
These are not required to be in plain English and may be difficult to understand. Have a qualified franchise attorney review them with you.
(#23) Receipt
An acknowledgement of receipt of the UFOC.
Attached Exhibits
The UFOC includes a number of attached exhibits. They include:
- Franchisor's audited financial statements
- A copy of each form and contract you will sign if you buy the franchise: franchise agreement, receipt form and other applicable forms (i.e., confidentiality agreements, non-competition agreements and software licenses)
- For multi-state offerings: a list of franchise regulators in each state; a list of franchisor's agents in each state; and other state-specific supplements required to conform the UFOC to applicable state law.
The importance of a good accountant and qualified franchise attorney
A representative from the North American Securities Administrators Association - the oldest international organization devoted to investor protection. -- recently advised Franchise Trade of the top two things prospective franchisees need to do with regard to the UFOC: Use the services of (1) a qualified franchise attorney and (2) a good accountant
A good accountant can review the information in the UFOC -- especially financial statements -- and put together a projection of your planned business; providing an educated opinion about whether it will be profitable and how much money it may generate.
A qualified franchise attorney is also immensely valuable in reviewing the UFOC and the franchise agreement which is contained within. With your interests in mind, an experienced attorney can identify any essential points of negotiation in the franchise agreement, a legally complex document.
A few things on the UFOC horizon
The FTC is presently considering a proposal to revise the Franchise Rule by replacing its current franchise disclosure requirements with new disclosure requirements based in large part on the UFOC Guidelines.
NASAA supports this effort. It asserts that the UFOC is a superior disclosure document than the current disclosure document required under the Franchise Rule, and believes there would be a significant advantage to franchisors if the FTC were to adopt a new Franchise Rule based on the UFOC model. Further, it believes it would reduce inconsistencies between federal and state franchise disclosure laws. The revised rule would stray from the UFOC guidelines in a few instances; in particular, to streamline the Franchise Rule and to reduce unnecessary compliance costs.
The revised Franchise Rule would also permit franchisors to furnish the UFOC electronically, including through the Internet. A franchisor would be able to make its disclosures online and give prospective franchisees a password to gain access.
An FTC representative informed Franchise Trade that he expects the revision of the Franchise Rule to be adopted soon by the FTC; most likely within the next year.
Copyright 2006, Attard Communications, Inc.
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