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Franchise Articles - UFOC / Agreements

What is the UFOC?

By: James Walker - Staff Writer for Red Hot Franchises.com

Potential franchisees may find themselves bombarded with information about the franchise they are interested in purchasing. Franchisors often use a multitude of sales tools, to entice potential franchisees to enter their franchise systems. These documents contain a wealth of information about the franchisor, which may seem repetitive and redundant. As a potential franchisee, you may think to yourself, “If I’ve seen one document, I’ve seen them all,” and assume that a quick read-through is sufficient to get the gist of the franchise. However, one of these documents should not be merely skimmed over.

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The Uniform Franchise Offering Circular, or UFOC, is one of the most significant documents you will receive from the franchisor, and it is imperative that both you and your attorney read it.

The UFOC serves as a protection for the individual against making a decision based on information not supported by fact. The FTC Rule requires franchisors provide the UFOC to the prospective franchisee at the earlier of the first personal meeting or 10 business days before the franchisee signs an agreement or pays any money. It also provides that the franchise agreement must be given to the prospective franchisee at least five business days before the franchisee signs any agreement or pays any money. A franchisor's UFOC must be updated on an annual basis, or sooner if certain conditions are met.

Here are some of the items a UFOC must contain:

History and Experience. The franchisor must provide you with a history of their past activities, especially as it may relate to potentially negative information. This information must be provided not only for the company itself but also for the officers and directors. The information includes factors like the business experience of the company and its principles and any fairly recent litigation or bankruptcy history for either.

Financial Factors. The company must disclose to you the relevant financial terms of the franchise opportunity. This would include the initial franchise fees, other startup costs, and an investment range estimate for your total cost to get into the business. The UFOC must also disclose any other fees, such as the royalty, marketing and renewal fees that the franchisee will have to pay throughout the life of their franchise.

Obligations and Restrictions. The company must disclose the obligations of both you and the company under the terms of the franchise agreement. They must also spell out any mandated restrictions that you will operate under in terms of your purchasing options and behavior as a franchisee.

Other Considerations. The company must also disclose relevant information on a number of other factors such as financing programs, territory, trademarks and patents, renewal or transfer provisions and public figures.

Exhibits. The company must also provide other data including audited financial statements, current franchisee lists with contact information, contracts and receipts.

Earnings Claims. FTC rules leave it up to the franchisor whether they want to supply information about the earnings that can be achieved in their business. If a franchisor does want to provide earnings claims, they must follow stringent rules on how this information can be given to a prospective franchisee. It is essential for the franchisor to make sure that the data provided is as accurate and representative as possible and they must also clearly label any assumptions or qualifications on the data provided. As a result, earnings claims can take a variety of angles and approaches, so reviewing the background information is vital.

Make sure you take the time to study the information supplied to you and you'll have a much better chance of making sure that these legal requirements actually serve their purpose of protecting or safeguarding your interests.