The Uniform Franchise Offering Circular (UFOC)
After doing some research, and identifying a few franchisors with good reputations that match your criteria for industry and lifestyle preferences, and investment level, you’re ready to make contact. This is where you enter the legal realm of contracts and paperwork.
Franchises operating in the U.S. are regulated by the Federal Trade Commission (FTC). To ensure that franchises are making honest and full disclosure about their franchise operations, the FTC mandates that a Uniform Franchise Offering Circular (UFOC) be provided to the prospective franchisee.
Although not subject to federal approval, the UFOC must meet legal approval in these fourteen states: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North and South Dakota, Rhode Island, Virginia, Washington and Wisconsin.
And though other states do not require approval of the UFOC, the franchisor must be registered with the state in order to sell franchises there.
The purpose of the UFOC is to give the prospective franchise buyer all the information about the franchise before an agreement is signed. It is a complicated document, with 23 sections, and you must have a lawyer experienced with franchise contracts review it. Check with your state’s Bar Association to find a franchise business lawyer.
The UFOC will supply you with information about:
- The company’s management structure, history and franchise experience.
- Legal status and any litigation history, including past and pending cases
- Fee schedules for opening, operating and terminating the franchise.
- Details of any financial arrangements the franchisor will offer the franchisee.
- Any restrictions on products and services offered.
- Data on existing franchises, such as how many are currently operating, how many have been opened, close or transferred.
- Trademarks, patents, copyrights and other proprietary assets.
- Projected capital investment, required purchases, and any territorial protection rights.
- What is required of the franchisee in the relationship, and mutual expectations for both parties.
The UFOC is subject to a ten-day cooling-off period, and the franchisor cannot accept an offer before that ten-day cooling-off period expires. If any changes are made to the UFOC, five days are added to that cooling off period. There is a receipt at the end of the UFOc for the prospective franchisee to sign.The ten-day period begins with the signing of this receipt. It does not establish any obligation on your part, just acknowledges that you have received the UFOC.
It is essential that you understand all sections covered in the UFOC. Ask you lawyer to explain anything you don’t understand. The UFOC is basically your starting point for negotiating the terms of the Franchise Agreement. It should raise some questions and issues that must be addressed before signing the agreement.
Remember -- the Franchise Agreement is a legal contract, so don’t sign it before you have satisfactorily worked out any problems.
Though uniformity is the hallmark of franchising, there is often room for negotiating the terms of the Franchise Agreement. Newer franchises eager to expand will probably be more flexible in negotiations. Well-known successful franchises may have standardized agreements that do not allow any deviation.
The UFOC review, which precedes the agreement, should inform you about all aspects of the franchisor and what to expect in the Franchise Agreement that follows the UFOC.
The UFOC is intended to prepare and protect prospective franchisees before signing the legally binding Franchise Agreement.
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