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You’ve heard of the Uniform Franchise Offering Circular, or UFOC. This allows potential franchisees to weigh the pros and cons of any franchise offering. Well, as of July 1, 2008, the Federal Trade Commission finished phasing in its amended Franchise Rule by getting rid of the UFOC and instating the Franchise Disclosure Document. The FDD not only includes the UFOC disclosure requirements, but requires more extensive disclosure on some topics. This can be helpful for potential franchisees, with more transparency on the part of franchisors.

The FDD will contain 23 items of information about the franchise, its officers and other franchisees, including information on the franchise’s litigation history, past and current franchisees (and ways to contact them), the exclusivity of a territory, what assistance will be provided by the franchisor and the cost of purchasing and starting up a franchise. Information about the financial performance of the franchise will also be included.

The new federal Franchise Rule will be much more closely in line with state franchise disclosure laws and changes in franchise marketing and new technologies. The Rule also aims to reduce compliance costs and address franchisee complaints about the franchisor - franchisee relationship.

Let’s examine what top areas require more extensive disclosure under the FDD:

1. Lawsuits franchisors filed against franchisees
2. Franchisors using “confidentiality clauses” during lawsuits
3. Warning when there is no exclusive territory
4. What “renewal” means for the franchise system

The biggest differences between the new Franchise Rule and the old UFOC requirements?

1. Franchises and business opportunities now have separate requirements under the new Rule.
2. More disclosure about earnings is encouraged, with information about business costs and financial results for a subset of franchisees (as opposed to results for the entire chain) available.
3. The FDD can now be sent electronically.
4. Disclosure of all the franchisee associations in their system (ones approved by the franchisor and independent associations).
5. The corporate parents of a franchisor must be disclosed if its guarantees the business and/or provides supplies to the franchisees.

So now that this new Franchise Rule is in effect, look for that FDD in place of the UFOC … and remember to read it carefully!

The Franchise Agreement is a legal contract and is actually part of the Universal Franchise Offering Circular (UFOC), which is supplied to prospective franchisees. The UFOC spells out everything about franchise operations – processes, marketing, costs, support etc. in 23 specific items. The Franchise Agreement is included in item #22, along with any other contracts that must signed, such as real estate leases or financing forms. The Franchise Agreement is attached as an “exhibit” and has blank spaces to be filled in preparation for the franchisee signing the contract.

The UFOC ends with a receipt that carries no obligation to the prospective franchisee – it just validates that the franchisee has received the UFOC. No money can be exchanged or a Franchise Agreement signed until ten days after acknowledgment of receipt of the UFOC. There is also a five-day waiting period for the signed Franchise Agreement once it is completed

After a prospective franchisee has reviewed the UFOC with an attorney and accountant, and is ready to sign the Franchise Agreement, the franchisor will fill in the blanks on the Agreement. These will stipulate in dense legal jargon the relationship and obligations between franchisor and franchisee. Once the Agreement is filled in with the details, the franchisee has five days to return the signed contract.

As part of the UFOC, which the franchisee acknowledges receiving, the Franchise Agreement spells out specifics on the initial franchise fee, ongoing fees and royalties, training and length of the contract. All of these should be examined and compared to the UFOC items. The Franchise Agreement should reinforce the obligations and expectations described in the UFOC.

Because the Franchise Agreement is the binding legal contract between the two parties, any deviation from the UFOC must be added to the Franchise Agreement. For instance, if the Franchisor is willing to make an exception regarding premise requirements, or if the Franchise Representative promises extra training or support, then make sure it is in the Franchise Agreement contract. Verbal promises are worthless. The Franchise Agreement, as part of the UFOC, implies that everything stated in the UFOC is part of the Franchise Agreement. If the franchisee negotiates exceptions that differ, even if only slightly, from the UFOC descriptions, then these negotiated exceptions must be detailed in the Franchise Agreement.

The Franchise Agreement is the legal document that governs the relationship between the Franchisor and Franchisee. In the case of any disputes, the Franchise Agreement is the ruling factor about the outcome. That is why it is so important to have an experienced franchise attorney review the UFOC and compare it with the Agreement terms.  The Franchise Agreement should match the UFOC items regarding fees, territory, training and duration of the franchise contract, and any exceptions to those items must be described in specific detail within the Agreement.

To find an attorney knowledgeable about franchise contract law, visit this link.

Click on the Franchisee tab at top, then go the listings at left. At the bottom, you’ll see a tab for attorneys. This takes you to a state-by-state directory of franchise lawyers.

Another helpful source for information is the International Franchise Association.

The Federal Trade Commission oversees franchise contract law, and the Agency’s web site has a Consumer Guide to Buying a Franchise, plus a Franchise Rule Compliance Guide.

The purpose of this article is to provide general information about recent developments in franchising. Nothing in this article constitutes legal advice, which can only be obtained as a result of personal consultation with an attorney.