Reading a UFOC

The United States Federal Trade Commission (FTC) monitors and regulates franchise activity. The FTC requires that all franchisors provide potential buyers with a copy of their Uniform Franchise Offering Circular (UFOC) at least ten days before signing of a franchise agreement.
Reading the UFOC is an important step in helping you assess the opportunity.

The UFOC is usually a lengthy legal document that can be painful to wade through, however the information provided in this document can be very important and may change your decision. Most franchisors are very resistant toward modifying their standard language or negotiating the terms in the UFOC, but you should have a thorough understanding of the terms to allow you to make an informed decision.

It is always a good idea to have legal counsel review the document before signing. All UFOC's follow the same basic outline and contain very similar standard provisions. Here are a few highlights to help simplify some of the standard components of a UFOC for easier comprehension.

Sections 1 through 4 provide historical information about the franchisor, and an overview of the background and management style of the leadership team.

These sections should disclose information about any litigation against the company. Be sensitive to any patterns of litigation.

Sections 5 and 6 provide detailed information on the initial franchise fee, royalty payments and advertising fees. This information should be clearly presented and be consistent with what you have heard from the representative.

Sections 7 through 9 provide information about additional start-up capital that might be needed. This may include training fees, set-up costs, inventory costs, and living expenses. This information should be built into your business plan.

Section 10 contains information about any financing programs offered by the franchisor. This can include direct financing from the Franchisor or assistance in obtaining financing from a third-party source. These financing terms should be compared with other sources of financing to ensure you are getting the best financing terms possible.

Section 11 contains information about the franchisors obligations to you. These typically include starting up assistance and ongoing support. The training program should be described in detail and the company's operations manual (or at least the manual's table of contents) should be included with the UFOC.

Section 11 will also contain an overview of exclusive relationships or supply agreements that give the franchise a competitive advantage through an established source of revenue and/or cost savings from established vendor relationships. Be aware of how much benefit actually is passed through to you as a franchise owner. Some franchisors will claim to have great established relationships that generate substantial revenue or cost savings, but after the franchisor takes their fees, the ultimate benefit may be substantially diluted.

Section 12 will address the issue of territory. The territory should be clearly defined. It is important to have a clear understanding of your protected territory and potential limitations to growth.

Sections 13 and 14 addresses trademarks, patents, copyrights and proprietary information. Any trademarks claimed by the franchisor should be registered to ensure your rights to future use.

Section 15 contains information regarding any obligations related to franchise owner participation in the day-to-day operation. Some franchises are designed to run with an absentee owner (meaning you will not be required to be actively operating the business). Other franchises require the owner to actively participate in the daily operation. Your obligation to participate in the operation of the business should be clearly stated in this section.

Section 16 contains information on any restrictions on what the franchisee is allowed to sell.

Section 17 includes information about franchise renewal, termination, transfer, and dispute resolution. This section addresses the process and potential limitations associated with future transfer of ownership. While information about renewing, terminating, or transferring the agreement may seem completely irrelevant at this stage, these issues will come up. Understanding your rights and limitations early in the process will help down the road.

Section 18 lists any public figures associated with the franchise and has little relevance to most companies.

Section 19 addresses earnings claims. Earnings claims related to franchises has been a sensitive issue and source of legal controversy for years in the franchise industry.

Franchisors are not required to make earnings claims to potential franchisees, and most don't. If earning claims are made they must be based on actual sales, costs, income and profits of existing franchises, or on reasonable and verifiable projections in cases where the franchisor does not have an existing track record.

Based on the history of litigation surrounding this issue, most franchisors will not make earnings claims. The best way to get information on the potential earnings is through direct contact with existing franchise owners.

Section 20 should contain a list of franchise locations, including the contact information for some current franchisees. Information should also be provided on franchisees who have left the system over the previous three years. Contacting both current and former franchisees to find out what they really think of the franchise and the franchisor is a very valuable part of your franchise search.

Section 21 will contain the franchisor's independently audited financial statements for the preceding two years. Look for where the revenue is coming from. Is it trending up or down? Is the company making money or does the company look like it is suffering financially? If you are not familiar with reading financial statements have an advisor look it over and give you some feedback.

The final two sections, 22 and 23 , contain all the documents the franchisee will be required to sign.

While the UFOC may seem like an overwhelming document with lots of worthless "legal garbage", the information outlined is very important and should be considered carefully before making your decision.