Before you get involved with a franchise and commit to a future within a specific brand or business, there are essential elements of the law that you need to know. That law is determined by the Federal Trade Commission (FTC), which requires franchisors to present all potential franchisees with a specific document offering disclosures at least ten days before a contract is signed or money changes hands. That agreement is known as the Uniform Franchise Offering Circular (UFOC). It is designed to help potential franchisees decide whether an opportunity is the right investment for them and, as such, contains a total of 23 sections.
The Franchisor and its Predecessors and Affiliates – This is the first section and provides specific information about the franchisor. This includes the location, the products / services available, and the experience of personnel working for the company.
Business Experience – This is the second section and it provides you with employment histories for all of the franchise brokers, board members, executives, officers, and management. This is to demonstrate their experience and provides specific information for the previous five years.
Litigation – This is the third section and provides information about any and all litigation that any of the officers, board members, management and executives, as well as the franchisor itself, have previously been involved in. Your attorney should fully investigate any issues arising here.
Bankruptcy – This is the fourth section and is similar to litigation in that it will detail bankruptcy issues instead of litigation proceedings.
Fees – The fifth section informs you of any upfront fees and charges that are applicable to you, including any initial franchising fee that must be paid.
Ongoing Fees – The sixth section details all costs, fees, and payments that are required to be paid following those in section five. This may be royalties, advertising, maintenance, construction, and even staffing costs.
Initial Investment – The seventh section details how much you will need to plough into the business to get it off the ground. These figures are essential for applying for financing and compiling your business plan. Of course, the figures here are typical rather than actual and more of an investment may be required.
Restrictions on Sources of Products and Services – The eighth section is complex on paper but is easy to understand as it details the goods that you are obligated to purchase or lease from the franchisor or its partners. There are often details like the quantities of goods you have to purchase, so you will have an insight into the running of the business.
Franchisee’s Obligations – The ninth section details your own personal obligations relating to the business and may or may not include policies, sale figures, training, and the site itself.
Financing – The tenth section will detail an outline of financial plans and arrangements that are available to you as a franchisee.
Franchisor’s Obligations – This eleventh section will take some reading as it is easily the longest area of the UFOC. It is also extremely important because it details the franchisor’s obligations to you. It includes various information and all of it is vital to your interests. Pay particular attention to the part outlining the advertising policy.
Territory – The twelfth section of the UFOC details your legal territorial obligations and rights. It outlines whether you have exclusivity or whether you will or may have to share a location with your competition.
Trademarks – The thirteenth section outlines the trademark rights held and whom they actually belong to. It also includes legal details of how the protection works, and thus how and when you will be able to use it.
Patents, Copyrights and Proprietary Information – Further to the above section, the fourteenth section covers ownership of patents and copyrights, and the conditions under which you may use them.
Obligation to Participate in the Actual Operation of The Franchise Business – This may sound complex, but the fifteenth section basically outlines whether you have to be involved in the business personally and the extent of your involvement.
Restrictions on What The Franchisee May Sell – Section sixteen outlines the products you will sell if you invest in the franchise, and gives ideas of further products that you may be able to sell at a later date.
Renewal, Termination, Transfer and Dispute Resolution – Section seventeen is there to protect the franchisor and franchisee because it tells you how and why you may be terminated as well as determining your rights. Should a conflict occur, it would also inform you of how to proceed with a complaint or issue.
Public Figures – The eighteenth section highlights the celebrities or public personas that will be involved in any marketing campaigns, as well as the way in which he or she will receive compensation.
Earnings Claims – The nineteenth section of the UFOC is an important one because it details typical profits, sales, and information about other franchisees. This is not required so it may not be there, but if it is not then do some research to satisfy your suspicions because you need to know these figures.
List of Outlets – Section twenty of the UFOC details statistics about the system that the franchisor employs, including the number of outlets and the location details of at least 100 of them. There will also be information about closures and contract terminations over the past three years.
Financial Statements – Category twenty-one of the UFOC relates to the franchisor’s financial background and the full statements of accounts for the previous three years. It also includes the current balance sheet. All of the above has to be certified by an accountant to maintain their validity. Your own accountant should examine them for you.
Contracts And Agreements – Section twenty-two is exactly what it says it is, so be sure to consult with your attorney to ensure that they are in your best interests.
Acknowledgment of Receipt by Respective Franchisee – The final section is literally an acknowledgement that you received the Uniform Franchise Offering Circular and is of no other consequence.
Although the Federal Trade Commission requires that all of the above be sent to you in the form of a Uniform Franchising Offering Circular (UFOC), they will not have reviewed or approved the information within the document. As such, it is your responsibility to check its accuracy via your attorney and make sure that the franchise business is really in your best interests.
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