Franchising

Learn more about the UFOC before buying a franchise. Franchising is a contract system between two parties-the franchisor and the franchisee. As with any contractual agreement, there are legal documents and agreements that must be followed by both parties. The first of these documents is called a UFOC, or Uniform Franchise Offering Circular. Essentially this document is a disclosure of specific types of information that the franchisor must present before any agreements are signed.

The FTC set out the first franchise rules requiring minimum disclosure in 1979, originally known as an offering circular. Since that time the format and content have continued to evolve, providing a stronger and more uniform means of disclosing information about the company from whom you may be proposing to purchase a franchise. There are two entities responsible for the evolution of the UFOC: the FTC (Federal Trade Commission), and the NASSA (North American Securities Administrators Association). The most commonly used form for the UFOC comes from NASSA and is accepted by the FTC.

There are 15 states that, in addition to requiring a franchise to have a UFOC before selling franchises, also require that the document be registered with the state. These states are known as registration states.

These states include:

• California
• Hawaii
• Illinois
• Indiana
• Maryland
• Michigan
• Minnesota
• New York
• North Dakota
• Oregon
• Rhode Island
• South Dakota
• Virginia
• Washington
• Wisconsin.

The important thing to realize about the UFOC is that while the document must contain certain required information, such as franchise fees and additional start-up costs, there is no auditing required of this agreement. In other words, the agreement has to be there but is not guaranteed by any third party to be accurate. Additionally, states that are not registered states do not require that a copy of the UFOC be sent to any regulatory agency.

A UFOC is designed to give you the information you need to make an informed decision about whether or not you would like to go into business with the franchise. As such, you can be reasonably sure that the information presented in such an agreement will be accurate. If a franchise blatantly misrepresents the opportunity, there is recourse through the courts. This is not to say that franchises make a practice of misrepresenting what they are offering, but rather a reminder of the age-old adage, "buyer beware". If you know what you are looking at you are much more likely to make a solid decision.

So what good does a UFOC actually do?

A UFOC provides many kinds of information, including information on the company officers and current franchisees as well as financial disclosures. The information provided in this document should give you a good overall picture of what the company is offering and with whom you would be working, but it also gives you resources to check out yourself. There are 23 areas, or items, within a UFOC. One of these items is contact information for current franchises. The importance of a UFOC is that it provides you with all of the information you need to review the franchise itself-but it is by no means end of researching a franchise opportunity.

What the UFOC contains

The UFOC includes information on the franchisor, the key company employees and how much experience in franchise management they bring to the company, as well as bankruptcy and litigation history. You want to know what kind of expertise you are buying into.

In addition, it includes all the information on the investment required for this franchise. This includes initial franchise fees, required equipment fees, start-up estimates, and any required purchases you'll need to make to get started. Suppliers with whom you are required to do business must be disclosed, as well as how much you are expected to contribute to things like the annual advertising budget and how much it should cost to set up your initial inventory.

The UFOC must also contain the legal agreement for trademarks, which products or services may be offered, and any reporting required from the franchisee. The obligations of the both the franchisor and the franchisee will be disclosed, and the rules governing the transfer, termination, and renewal of the franchise agreement are included.

An earnings claim (what you should be able to earn) may or may not be included and is not a required item of the UFOC. If it is included, make sure that the company can verify their claims.

There are other agreements that must be decided between franchisor and franchisee. While some of these agreements may be laid out in the UFOC, others could change depending on the requirements of the individual franchise agreement. Things like protected territory are often decided on an individual basis. In these cases, any other agreements that will be required must be attached to the UFOC, including the individual franchise agreement in its generic form.