What You Should Know about the UFOC


If you've done any research into a franchise by now, you have most likely come across references to a document called the UFOC. The UFOC stands for Uniform Franchise Offering Circular. The UFOC is a form of franchising disclosure document that satisfies the requirements of the Federal Trade Commission (FTC), outlined in 1979, to help protect potential franchisees. The stated purpose of the FTC ruling is as follows:

The Rule is designed to enable potential franchisees to protect themselves before investing by providing them with information essential to an assessment of the potential risks and benefits, to make meaningful comparisons with other investments, and to further investigation of the franchise opportunity.

The specific UFOC format was approved by the North American Securities Administrators Association (NASAA) in 1993, which was in turn approved by the FTC in 1995. The UFOC represents a stricter format than the FTC rules dictate alone. Currently, there are 15 states in all that require franchisors to divulge the UFOC to prospective franchisees. These states are California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin. Most franchises use the UFOC format to help conform.

What is it Good for?

A UFOC contains details on the operations, costs, history, and many other aspects of the franchise that are vital to understanding it fully. A wise franchise researcher will use the document to study the opportunity in detail. Most people are dismayed by the length of the UFOC, which can run hundreds of pages, and the language used, which is rife with legalese. The UFOC may be difficult to understand at first, but after looking through a few, you will begin to see the similarities in the structure, and pick out information more easily. Even if you are only interested in one particular franchise, you should study several anyway—the differences can be illuminating. Keep in mind that UFOC's are written with a best faith effort of accuracy, they are not guaranteed or fact-checked by the government. For this reason, it is imperative to read them carefully and to enlist the help of a lawyer where appropriate.

The UFOC: A Document of Many Sections

After receiving a Franchises UFOC, there is a mandatory 14-day wait period imposed on both the franchisor and the potential franchisee, before any contract signing can occur. This imposed waiting period is meant to encourage a careful review of the document.

Each and every UFOC will contain at least the following sections, or items:

0.  Cover Page
1.  The Franchisor, Its Predecessors And Affiliates
2.  Business Experience
3.  Litigation
4.  Bankruptcy
5.  Initial Franchise Fee
6.  Other Fees
7.  Initial Investment
8.  Restrictions On Sources Of Products And Services
9.  Franchisee's Obligations
10.  Financing
11.  Franchisor's Obligations
12.  Territory
13.  Trademarks
14.  Patents, Copyrights and Proprietary Information
15.  Obligation To Participate In The Actual Operation Of The Franchise Business
16.  Restrictions On What The Franchisee May Sell
17.  Renewal, Termination, Transfer And Dispute Resolution
18.  Public Figures
19.  Earnings Claims
20.  List Of Outlets
21.  Financial Statements
22.  Contracts
23.  Receipt
24.  Franchise Agreement

0. Cover Page
The cover page is just a snapshot of basic company information, such as the name and contact information of the franchise. It will also contain a very brief description of the business concept and the costs associated with the franchise.

1. The Franchisor, Its Predecessors And Affiliates
This section contains three important elements: The history of the franchisor as a business, the disclosure and histories of the previous business entities and affiliated business entities, and a more detailed description of the franchise opportunity. This section provides good background information and can give you some clues as to the successfulness of the franchise through it's past history and affiliates.

2. Business Experience
Business experience refers to the chief operators of the franchise business. The business experience section gives a short timeline and biography for each of the important officers of the franchise. This section helps to provide credibility (or lack thereof) based on the business experience of those executing the parent franchise operations.

3. Litigation
Item 3 discloses any and all litigations that have taken place on behalf of or against the franchise. This is an important section in determining the trustworthiness of the franchise. Keep in mind that many franchises have been involved in litigations, this does not necessarily make that franchise bad or untrustworthy. According the research firm FRANdata, approximately half of all franchise businesses have been involved in some litigation over a ten year period. What you should pay attention to then are the percentages of litigations per franchisees. Section 20 will indicate how many franchisees currently operate. A litigation rate of 3% or more is considered high, given an established franchise of 25 or more outlets. Judging franchises smaller than 25 is difficult. You can also consult a lawyer and look for consistency in the types of litigations to help determine trends or problems.

4. Bankruptcy
Section 4 discloses any and all bankruptcies experienced by chief officers of the franchise, the franchise itself, and any franchisees past or present. Like litigations, bankruptcies themselves do not immediately indict the franchise of any wrongdoing. Context is important in determining what these incidents mean.

5. Initial Franchise Fee
This section will describe the franchise fee in detail. It will explain how the fee is derived; what, if anything is granted to the franchisee after payment; and what sorts of discounts apply, if any. Territorial concerns are usually addressed in this section as well.

6. Other Fees
"Other Fees" indicates all the ongoing and one-time miscellaneous fees associated with owning the franchise, but not included in the initial investment portion. The fees are described in some detail. It is here that you will learn of any royalties, advertising fees, marketing fees, and/or service fees that may apply to you on an ongoing basis. It is a good idea to add up all the ongoing fees in their proper time scales to help you estimate monthly expenditures, and therefore, potential cash flow concerns. Consult an accountant to be absolutely sure that the franchise fee schemas are set up fairly.

7. Initial Investment
The Initial Investment section contains the breakdown of every element in the start-up cost of the franchise. Explanatory notes are provided after the breakdown for additional clarification. In most cases, there will be a range for the possible investment from low to high. The margin can be quite wide, as the particulars of your situation and location will dictate much of the costs.

8. Restrictions On Sources Of Products And Services
The section heading refers to the standards of the franchise in terms of what they offer to the consumer. You will be bound to offer whatever quality of good or service the franchise deems appropriate. This section may also discuss liabilities, required insurance, operating capital needs, and other miscellaneous requirements such as vehicular transportation, home office supplies, and apparel.

9. Franchisee's Obligations
This section is very useful. It puts all of the franchisee obligations in both the Franchise Agreement and the UFOC into a table, and instructs you on where to find them. Use this section as a guide on where to find out about your various obligations as a franchisee.

10. Financing
The franchise's policy on financing must be discussed here. If the franchise does not offer any help with financing, it will be stated in this section. If they do, the terms and conditions of the financing will be spelled out.

11. Franchisor's Obligations
One of the greatest single sources of information of all the sections in the UFOC, the franchisor's obligations section describes many aspects of the franchise. The section will continue to expound on the requirements of the franchisee (contrary to the title of the section), provide at least the table of contents for their operations manual, explain the training and ongoing assistance provided by the franchisor, obligations to participate in marketing, and an estimated time period to start-up.

12. Territory
The Territory section describes the extent of your territory and what fees are affected by it. Also pay attention to whether or not your territory will be protected and how it will be protected. It may be cause for concern if the protections are too minimal. A lawyer may be able to help you understand the ramifications of weak territory protections.

13. Trademarks
This section will inform as to which trademarks you are being given the rights to use, and what the terms and conditions of that use are.

14. Patents, Copyrights and Proprietary Information
From this section, you will learn which aspects of the franchise are proprietary.

15. Obligation To Participate In The Actual Operation Of The Franchise Business
The franchisee's obligations to participate in the business is mainly to discern what sort of hierarchical structure is allowed with the franchise management and what kind of a workweek you are required to fulfill. If you have time restrictions on your schedule, this section will allow you to determine whether or not it will be a problem.

16. Restrictions On What The Franchisee May Sell
This is where the franchisor will illustrate the extent to which you may operate a business within or around the franchise opportunity. It will also further describe your obligations in providing goods to the consumer.

17. Renewal, Termination, Transfer And Dispute Resolution
Although no one wants to imagine a time when they have a need to resolve a dispute or invoke termination contingencies, you should look over the elements anyway to determine if you are comfortable with these scenarios. Problems do arise, and the ability to solve them easily is paramount. The section will also instruct on how long the Franchise Agreement lasts and what procedures must be taken for renewal (if there is any renewal option). If you are considering owning a franchise long term, you should make sure how the renewal process works.

18. Public Figures
This section discloses what, if any, people or entities in the public eye are endorsing the franchise business. Any famous athletes or celebrities being paid to advertise the franchise business will be discussed here.

19. Earnings Claims
The most sought after section of the UFOC is the Earnings Claim section. Franchises are not required to give earnings claims in the UFOC, but if they do, their content is strictly regulated by the FTC. The FTC wants to ensure that the data is displayed without bias or confusion, since an earnings claim is such an important statement to represent properly. Assumptions must be labeled clearly, and the statements must be presented in the proper format. As a result of their nature, earnings claims can be difficult documents to examine. An accountant will be able to help decipher the earnings claims should you have any trouble.

20. List Of Outlets
The franchise is required to provide a list of all franchisees that operated in the system for the last three years. Names, phone numbers, and addresses will also be provided. This section is another very important section, as it will enable you to critique the franchise most thoroughly. You will be able to gauge the rate of drop off in franchise ownership as well as have access to all the contact information of each present franchisee. You will need those contacts to ask incisive questions and learn what you can.

21. Financial Statements
The UFOC must include the balance sheets and income statements of the franchise for the last three fiscal years. These statements will usually appear in the appendix. If you do not understand how to interpret the statements, use the services of a certified accountant to interpret what these statements mean.

22. Contracts
Franchises are required to disclose any contracts they have with various institutions to the franchisee. If you are unsure of how to interpret the contracts, use legal counsel.

23. Receipt
Every UFOC provides a receipt. The receipt is to verify for the company, that they did in fact send the UFOC to the prospective franchisee, as they are supposed to.

24. Franchise Agreement
The UFOC must also contain a copy of the Franchise Agreement. The Franchise Agreement is a separate document that serves as the formal contact between the franchisor and the franchisee. It should also be reviewed carefully.

Final Thoughts

Individual states may have their own requirements as to the disclosure document required by Franchises. Such requirements will be listed in addendums after section 23.

The task of understanding the details in a UFOC can be challenging, but doing so will give you the understanding necessary to weigh your options. Remember that the UFOC exists to protect you as an investor. In California, Hawaii, Illinois, Indiana, Maryland, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin, all franchises who wish to conduct business in these state are required to file UFOC's as a matter of public record. The UFOC exists to protect you.