The UFOC is by far the most vital piece of information that any potential franchisee needs to carefully investigate when considering purchasing a franchise. Franchises are regulated by law, and the FTC (Federal Trade Commission) requires all franchisors to provide a UFOC. Basically, it is the “blueprint” of the franchisor, and this document must be provided to any prospective franchisee so he/she can make an informed decision.
Some key items included in the UFOC are the investment required, the franchisor’s management staff and experience, territory rights you are given, and your responsibilities as a franchisee. The initial portion of the document encourages the potential franchisee to read the UFOC in its entirety, and suggests reviewing it with an attorney or other qualified advisor.
The franchise agreement details the rights of both the franchisor and the franchisee and tells how the franchisor’s trademark can be used, the length of time of the agreement, advertising, payments for the purchase of the franchise, renewal fees and specific terms, and what specific supplies can be purchased from the franchisor. This agreement also outlines the legal requirement of the termination of the agreement.
In addition to the legal agreements involved in buying a franchise, keep in mind that that the major reason for buying a franchise is that you agree to follow a proven, successful operating system. That being said, you need to consider some of the restrictions in the actual day to day management of a franchise business. While a certain amount of creativity is welcome, you need to feel comfortable running your business with a set of rules that are primarily defined by the franchisor.
I will now touch briefly on each of the 23 standard items contained in the UFOC.
1. The Franchisor, Its Predecessors And Affiliates. The Franchisor describes the company and the franchise. Here, you’ll discover the franchisor name, affiliates, address, type of franchise being offered, and prior business experience of the franchisor, its predecessor, and its affiliates.
2. Business Experience. The prospective franchisee receives professional and biographical information about those individuals having significant responsibilities within the operation of the business, such as the franchisor, its officers, executives and directors. Also included here are franchise brokers and consultants.
3. Litigation. Disclosed here will be any relevant current and past criminal and civil litigation involved in by the franchisor and its management.
4. Bankruptcy. If the franchisor or a member of its management has ever gone through bankruptcy proceedings within the past 15 years, it will be disclosed here.
5. Initial Franchise Fee. Here, you’ll find information about the initial fees and any other payments, including terms, made to the franchisor upon the execution of a franchise agreement.
6. Other Fees. Item 6 provides details of all recurring fees that the franchisee must make to the franchisor, including: realities, training fees, advertising, insurance expenses, audit costs, renewals, leases, and any other fees for services provided by the franchisor.
7. Initial Investment. Listed in a table format, included are all the expenditures the franchisee is required to make, usually with a high and low range given, for specifics such as equipment, inventory, fixtures, construction, real estate, etc. Also disclosed here are payment details, such as who the payee is, if it is refundable, and whether it is financed.
8. Restrictions On Sources Of Products And Services. Any restrictions or requirements on what the franchisee can buy or lease for the business and where they can be purchased will be specified here. This would include products, services, insurance, fixtures, and equipment.
9. Franchisee’s Obligations. Here, a reference table indicates where, in the franchise agreement, franchisees can locate specific obligations that are agreed upon. The list tells of the franchisees obligation, where it is found in the UFOC, and where it is found in the franchise agreement. At times, individual franchisees obligations may vary.
10. Financing. If the franchisor provides financing assistance to their franchisees, the terms and conditions of the financing arrangements offered directly or indirectly would be detailed here.
11. Franchisor’s Obligations. By investing in a franchise, you receive specific services from the franchisor. Item 11 spells out these services, which may include site selection, training, advertising, and market research.
12. Territory. If the franchisee has been provided specific territory rights, they will be disclosed in this section.
13. Trademarks. Here, the franchisor must provide the franchisee with information about the company’s trademarks, trade names, and service marks that will be used. Also, you’ll find a list of states and countries where they are registered and any limitations that the franchisee must abide by in the use of them.
14. Patents, Copyrights and Proprietary Information. This section provides the franchisee with information regarding the patents and copyrights the franchisor may have, as well as any confidential information, and how it may be used by the franchisee.
15. Obligation To Participate In The Actual Operation Of The Franchise Business. Depending on the franchise, the owner may be required to devote full time to the operation of the business. Others allow absentee ownership, or a manager that is trained by the franchisor may operate the business. The terms and conditions of overall participation are disclosed here.
16. Restrictions On What The Franchisee May Sell. This section discloses any restrictions on the goods and services that the franchisee may offer its customers.
17. Renewal, Termination, Transfer And Dispute Resolution. This section discusses very in-depth the overall terms of the agreement. It discloses length of the term of the agreement, reasons the franchisor or franchisee may terminate the agreement, any obligations of either party after the agreement, whether either party may transfer the agreement to another person, dispute resolution, and restrictions on competition, to name a few.
18. Public Figures. If the franchisor has an endorsement agreement with a celebrity or other public figure, the amount he/she is paid and whether or not he/she has a role in the actual management of the franchise must be disclosed here.
19. Earnings Claims. Many franchisors make a claim of actual or potential sales, income, or profit for a franchised location. If they do, it’s disclosed here. Obviously, this is a very important section to a potential franchisee.
20. List Of Outlets. The franchisor provides information regarding the number of franchised units and company-owned locations, the names, addresses, and telephone numbers of franchisees, the number of franchises transferred or terminated, non-renewed units reacquired by the franchisor, and information on non-renewed or terminated units and the causes.
21. Financial Statements. Disclosure of the franchisor’s financial statements (audited) for the past three years is required.
22. Contracts. Here, the franchisee is provided with a list of license agreements that he/she is required to sign and attach to the UFOC.
23. Receipt. The franchisee is required to sign a receipt that he/she has received the UFOC.
In addition to the UFOC, it is strongly recommended that potential franchisees contact several existing franchisees with a specific list of questions to receive answers to, which I will discuss in detail in a future article.
In summary, by thoroughly reviewing the franchisor’s UFOC, the potential franchisee is provided with a tremendous amount of information allowing him/her to make a calculated, educated decision as to whether that franchise is the best fit. Most franchises are successful as they have a proven track record and usually have immediate cash flow. Assuming you can follow the franchise rules, you will most likely enjoy success.
Cory Barber is a professional franchise consultant affiliated with the world’s top franchise broker network. His free, confidential consulting services help guide you through the entire process of purchasing a franchise based on your background, skillset, lifestyle, and financial goals. For more information about his free Franchise Consulting Service contact Cory at his office: 877-271-4305.