If you're in the market for a franchise, know this: Since 1979, franchisors have been required by the Federal Trade Commission to provide prospective franchisees with a Uniform Franchise Offering Circular (UFOC) before any contracts can be signed or any money can exchange hands.
This valuable and voluminous document contains detailed information about the franchise, which will help you evaluate the business to determine if it's right for you. The document contains three main components:
- Detailed information about 23 items that provide an overview of the franchise
- Audited financial statements
- The franchise agreement and other contracts
Understand what's in itA standard UFOC covers the following: key executives and directors, fees and costs, any past or pending bankruptcy or litigation, restrictions on sources for products or services, any financing available, training and support offered, restrictions on territory or expansion, restrictions on selling or transferring ownership, a list of outlets, earnings and financial status, obligations for both the franchisor and the franchisee, plus renewal and termination terms.
Compare UFOCsCompare UFOCs from competitors or franchises in like industries to help you evaluate the opportunity.
Scrutinize earnings claimsItem 19 provides a detailed look at earnings, which gives you an opportunity to forecast sales, expenses and profits. Be aware that the earnings claims are considered estimates and may not reflect actual sales in your geographic region. In addition, the earnings statement is voluntary, and a franchisor may leave it blank.
Discover details on past and present franchiseesItem 20 includes a somewhat confusing list of projected openings and transferred or cancelled locations. However, the most important element is a list of current and past franchisees, their locations and contact information. These franchisees are your link to inside information about the franchise that can't be found in the UFOC.
Hire a franchising attorneySince 1993, the UFOC has been required to be written in plain English rather than legalese. However, the sample contracts found in Item 22 are legal documents that may need some deciphering. In addition, although the UFOC is required by law, no governing body reviews the document for accuracy.
Bring in an accountantTake the audited financial statements found in Item 21 to an accountant, who can review them and give you an idea of the financial health of the operation.
Ask if it's negotiableThe terms in a UFOC are usually non-negotiable. However, a few franchisors will negotiate certain terms so be sure to ask if there's any leeway.
Find out if you qualify financiallyYou may need to qualify financially before receiving a UFOC from a franchisor.
- Read it again: Experts suggest reading a UFOC at least three times before making a decision.
- Do your own homework: Don't rely solely on the information presented in a UFOC to make your decision. Conduct your own research to determine the viability of an opportunity.
- Consistency counts: Make sure the UFOC you review is the same franchise agreement you'll be signing.