Evaluating & Buying a Franchise

Understanding the Uniform Franchise Offering Circular (UFOC)

How Do I Find the Right Franchise?

Substantial, detailed, and sometimes complicated, the UFOC is an intrinsic part of your decision-making process - and understanding it is vital to your future success.

Weeks of research have finally paid off - you've found a terrific franchise opportunity. Congratulations! But before you run and sign on the dotted line, you need to find out if this business is really as good as it appears to be. Your job now? To thoroughly investigate the Uniform Franchise Offering Circular, or UFOC.

The Federal Trade Commission (FTC) demands that a franchisor provide full disclosure to a prospective franchisee in the form of the UFOC. By law, you must be given the document at least 10 days before signing any franchise agreement or during your first face-to-face meeting, whichever comes first.

Designed to supply you with all the information you need to fully consider a franchise offering, the UFOC is your prime source of business knowledge - it's your encyclopedia of franchise information, so to speak.

Each UFOC follows the same three-part format, no matter what franchise opportunity it represents. Included in the first portion of the document are 23 sections which describe every aspect of the franchise program. The second section contains a set of the franchisor's audited financial statements, while the third section supplies a copy of each of the forms or contracts you'll sign if you buy the franchise.

Even though the UDOC document may seem thick and intimidating, don't make the error that many prospective franchisees make and push the document aside-study it! While you're reading, take note of any questionable areas you discover and dig deeper whenever possible.

Key UFOC Items

You may not wish to delve deeply into your UFOC right off the bat. If that's the case, here are the key items that you should be aware of.

Item 1: The Franchisor and its Predecessors and Affiliates: This is where you learn the basic facts about the franchisor, including where it does business, what kind of product or service it plans to offer and whether or not any of the personnel have prior business experience in the field.
Item 2: Business Experience: Here the franchisor must disclose the main occupations, past employers and details of the past five year's work for all officers, board members, executives, management and franchise brokers.
Item 3: Litigation: This section discloses if the franchisor, its predecessors, the persons listed in Item 2 or any of their affiliates are presently involved in, or have been involved in, any litigation. If you do find several actions - especially where franchisees have sued the company-make a note and investigate it further.
Item 4: Bankruptcy: Here, the franchisor must disclose any bankruptcy matters involving itself, its affiliates, its predecessors, its officers etc. that occurred within the past 10 years. Directors and other executives are not required to divulge this information, however.
Items 5 & 6: Initial Franchisee Fee & Other Fees: This section summarizes the initial franchisee fee to be paid, ongoing royalty fees and any other charges you may be required to pay, such as group advertising costs and construction costs.
Item 7: Initial Investment: This part discloses the franchisor's estimate of the typical total investment by the franchisee, in chart form. This information is key to preparing your own business plan or when you are financing the franchise.
Item 8: Restrictions on Sources of Products and Services: This item tells you if franchisees are obligated to buy or lease products and services from the franchisor or from other designated suppliers. Basically, it tells you who you can buy from, where the suppliers are located and how much you have to purchase from these sources.
Item 9: Franchisee's Obligations: Your obligations are listed here in table form and cross-referenced to the section of the franchise agreement and UFOC item where they are discussed. Your obligations may include such things as: selecting and acquiring your site, training, fees, standards and policies and sales quotas.
Item 10: Financing: This outlines the terms and conditions of each financing arrangement that is offered to franchisees. Terms of each option may be laid out in a table for easy comparison.
Item 11: Franchisor's Obligations: The longest section of the document, this portion outlines the franchisor's obligations to its franchisees, including assistance in locating a suitable site, hiring and training employees and offering products or services. This section also lays out the minute details of the franchisor's advertising program.
Item 12: Territory: Here your territorial rights are revealed. This section also discloses if the franchisor can establish another franchise within your geographical area, either now or at some future date.
Item 13: Trademarks: This is where you learn who owns the trademarks for the franchise and whether this trademark is protected. It also discloses the principal trademarks of the franchise which the franchisee will license for their own use.
Item 14: Patents, Copyrights and Proprietary Information: Here you are told whether the franchisor owns the patents or copyrights that are material to the franchise and their plans (if any) to renew these. If this is confidential information, the franchisor must still disclose their general subject matter and the terms and conditions under which a franchisee can use this copyrighted information.
Item 15: Obligation to Participate in the Actual Operation of the Franchise Business: This tells the potential franchisee whether they must personally participate in the operation of the franchise or if the franchisor simply recommends participation.
Item 16: Restrictions on What the Franchisee May Sell: This portion describes the franchise system's product line and discloses any restrictions you might have on what goods and services you are allowed to provide.
Item 17: Renewal, Termination, Transfer and Dispute Resolution: This reveals your rights to terminate, renew or transfer your franchise and also outlines the approved methods for resolving disputes and conflicts with the franchisor.
Item 18: Public Figures: This section outlines the role of public figures in any franchisor marketing campaigns, including how the person is compensated and the total investment of the public figure in the franchisor. Remember-no matter how famous a celebrity is, their endorsement doesn't guarantee a franchisor's success.
Item 19: Earnings Claims: This key section shows what kinds of sales or profits other franchisees in the system have made. It's important to note, however, that many franchisors don't reveal this information, as this is not required by UFOC guidelines. If no performance information is revealed, find out why. It could be that many of their franchisees are doing poorly or that there is a wide range of earnings between different areas.
Item 20: List of Outlets: This item lists the statistical information for the entire franchise system, including how many franchise outlets are open and the names, addresses and telephone numbers of at least 100 franchisees and their sites. It also discloses how many outlets have been transferred, closed or terminated within the past three years.

The Financial Statements

The second major section of every UFOC document outlines the financial background of the franchisor and includes their complete financial statements. In fact, one of the UFOC's biggest strengths is that it delivers three years of audited financial information about the franchisor.

Item 21 of the document should include a balance sheet for the most recent fiscal year, an income statement, as well as all changes in the franchisor's financial position for the three most recent years. To guarantee their authenticity, these statements must be in the form of audited reports by a certified public accountant and they must represent what an average franchisee can realistically achieve. Financial documents are notoriously difficult to read, so always have a qualified accountant go over these figures with you.

The Franchise Agreement

Section three of the UFOC document consists of a sample franchise agreement, which is the backbone of your franchise system. As such, it gives both you and the franchisor a clear understanding of your duties and outlines in detail how you will operate your business. The franchise agreement also ensures uniformity throughout the system - when both the franchisee and the franchisor know what's expected of them, each side can fulfill their obligations with ease. The franchise agreement also outlines what will happen if a franchisee does something wrong, including the steps and notices the franchisor must give as a means of guidance and correction. In short, the franchise agreement is your roadmap for success in that particular franchise system.

Whether you want to open a donut shop or a transmission repair outlet, the basic UFOC document remains the same. Filled with everything you need to know to run your desired franchise, the UFOC takes you every step of the way - from your initial dream of owning a business to what might happen if you can't fulfill your legal obligations. Substantial, detailed, and sometimes complicated, the UFOC is an intrinsic part of your decision-making process - and understanding it is vital to your future success.