What is the Uniform Franchise Offering Circular (UFOC)?
The Federal Trade Commission (FTC) requires franchisors to furnish franchisees with a Uniform Franchise Offering Circular (UFOC). The UFOC is a legal document which must be presented to the potential franchisee at least ten days before the signing of the franchise agreement. It contains important information about the franchise operation, and its purpose is to help franchisees determine if a particular franchise opportunity is right for them. All Uniform Franchise Offering Circulars follow the same format, and contains 23 categories that describe every aspect of the franchise program.
The UFOC begins with "The Franchisor and its Predecessors and Affiliates." This category tells you about the franchisor, where they are located, what products or services it plans to offer, and what prior business experience personnel have in the field. The second category, "Business Experience" gives you information regarding the main occupations, past employers, and details of the past five years work history for all officers, board members, executives, management, and franchise brokers.
The third category of the Uniform Franchise Offering Circular is "Litigation." This tells you if the franchisor, its predecessors, officers, board members, executives, management, and franchise brokers, or anyone else affiliated with the business, are involved in any litigation - past or present. These findings should be investigated by your attorney. The fourth category is "Bankruptcy," which discloses any bankruptcy issues involving the company, its affiliates, or predecessors, that occurred within the past ten years.
Category five of the UFOC informs you of all of the initial fees that are to be paid, including the initial franchise fee. The sixth category lists other fees, such as ongoing royalty payments, group advertising, construction costs, or other fees. Category seven, "Initial Investment," is important for preparing your business plan, or obtaining financing, as it discloses the franchisors estimate of the typical total investment the franchisee will need to make. Keep in mind, this is the typical investment - not the actual investment.
The eighth category is "Restrictions on Sources of Products and Services." This tells you if you are obligated to buy or lease products or services from the franchisor or other designated authorized suppliers, including the quantity that you will be expected to purchase from these suppliers. Category nine, "Franchisee's Obligations," lists your obligations, such as selecting and acquiring your site, training fees, standards, policies, and sales quotas.
The tenth category of the Uniform Franchise Offering Circular is "Financing." This simply outlines the terms of the financing arrangements that are offered to franchisees. The eleventh category, "Franchisor's Obligations," is the longest section of the UFOC. It tells you what the franchisor's obligations are to you, such as training, and it also gives you the details of the franchisor's advertising program.
"Territory" is category twelve. This lays out your territorial rights, and tells you whether or not the franchisor can open another franchise within your geographical area. Category thirteen, "Trademarks," tells you who owns the trademarks for the franchise, and how the trademark is protected, as well as how you will be allowed to use the trademark. Category fourteen, "Patents, Copyrights and Proprietary Information," covers who owns the patents and copyrights, plans to renew the patents and copyrights, and the conditions that will allow you to use these patents and copyrights.
Category fifteen of the UFOC, "Obligation to Participate in the Actual Operation of The Franchise Business," tells you whether or not you are required to personally participate in the operation of your franchise. "Restrictions on What The Franchisee May Sell" is category sixteen, and this describes the product line, and discloses any restrictions for other products or services you may be allowed to offer your customers. "Renewal, Termination, Transfer and Dispute Resolution" is category seventeen. This informs you of your rights and conditions for termination, renewal, or transfer of your franchise, and also gives you information for the approved methods of resolving conflicts and disputes with the franchisor.
Category 18, "Public Figures," relates to the role of public figures in any marketing campaigns you may have. This includes information regarding how the person will be compensated. Category 19 of the UFOC is an important section called "Earnings Claims." This discloses typical sales and profits of other franchisees in the company. Do not be alarmed if this information is not provided, because the FTC does not require this information in the UFOC guidelines. However, if no performance information is given, you may want to find out why.
Category 20 of the UFOC, "List of Outlets," gives you statistical information about the franchise system. This should include the number of outlets, and the names, addresses, and telephone numbers of at least 100 franchisees. This section also tells you how many outlets have been transferred, closed, or terminated within the past three years.
Financial statements make up category 21 of the UFOC. This should disclose the financial background of the franchisor. It should include their complete, audited, financial statements for the past three years, as well as a balance sheet for the most recent fiscal year. These financial statements must be audited by a certified public accountant (CPA). Since financial statements are often difficult to understand, you should have your own CPA go over these and explain them to you. Category 22 of the UFOC contains the contracts and agreements that you will be expected to sign if you choose to buy the franchise. You should go over this section with your attorney. The twenty-third category is the "Acknowledgment of Receipt by Respective Franchisee," which is used to simply acknowledge that you did receive the Uniform Franchise Offering Circular.
It is important to note that while this document is required by the FTC, the FTC has not reviewed the contents of the UFOC that franchisors submit to franchisees to ensure it's accuracy. You should hire an attorney to check the facts that are stated in the UFOC.
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