UFOC/ FDD Information

Once you’ve decided, after conducting the necessary research, reviewing your finances, and consulting with an accountant and attorney about your situation, you’re must prepare to tackle the paperwork that precedes franchise ownership.

The primary document to examine in-depth is the Uniform Franchise Offering Circular/ Franchise Disclosure Document (UFOC/ FDD), which must be issued to all prospective franchisees at least ten days before the signing of any contracts. The UFOC/ FDD details all aspects of the franchise system, such as fees, royalties, operational procedures, training, support, marketing, trade dress – everything associated with running the franchise.

Since the Federal Trade Commission regulates franchise agreements, the UFOC/ FDD must conform to FTC requirements regarding disclosure about the business. In some states, franchises are also required to be registered and approved by the state.

The Franchise Agreement is actually part of the UFOC/ FDD – you cannot receive or sign an agreement without first receiving the UFOC/ FDD. Basically, the UFOC/ FDD spells out all the responsibilities and expectations for the franchisee and franchisor. The ensuing Franchise Agreement acts as a legally binding contract that states each party will uphold all the provisions detailed in the UFOC/ FDD or any negotiated items described in attached amendments or addendum to the UFOC/ FDD.

The 23 UFOC/ FDD Items

There are 23 different sections within a standard UFOC/ FDD:

1. The Franchisor, Predecessors and Affiliates – describes the type of business and its history, such as mergers and acquisitions, and discloses corporate information such headquarters location.
2. Business Experience – identifies all key personnel and affiliates who play a significant role in business operations, and their business experience over the past five years.
3. Litigation – details history of criminal, civil and administrative litigation involving the business or any of the officers, owners, directors or executives of the company.
4. Bankruptcy – reveals if any of the company directors or officers have filed for bankruptcy during the past 15 years; and if so, what were the circumstances and outcomes.
5. Initial franchise fees – states what the initial fees are to buy the franchise, how the money is used, and what, if any, refund is available should the Agreement not be fulfilled.
6. Other Fees – discloses all fees and payments required of the franchisee, such as royalties, insurance, advertising, training, and any other payments due to the franchisor.
7. Initial Investment – estimates how much the franchisee can expect to invest in equipment, supplies, real estate, furnishings, working capital and other costs associated with starting up the business.
8. Restrictions and Obligations on Products and Services – describes the designated sources the franchisee must use for equipment, supplies, and services; and whether the franchisor earns revenue from these designated sources. 
9. Franchisee’s Obligations – details the specifications for anything the franchisee must lease or purchase and from what supplier, with information about discounts and procedures for using designated suppliers.
10. Financing – provides information on any financing programs the franchisor may extend to franchisees.
11. Franchisor’s Obligations – describes the operational assistance, such as training, advertising, site selection, market research and computer programs provided by the franchisor.
12. Territory – states how the territory is established (e.g. by square mileage, population etc.), whether it is exclusive, and retention rights of both the franchisee and franchisor to the territory.
13. Trademarks  -- describes all trademarks, trade names, logos and commercial symbols registered with the U.S. Patent and Trademark Office. 
14. Patents, Copyrights and Proprietary Information – covers the patents and copyrights owned by the franchisor, and may also describe “business trade secrets.”
15. Participation Obligation – states whether, and to what extent, the franchisee must be personally involved in running the franchise business operations.
16. Restrictions on Goods Sold – imposed limits and restrictions on what the franchisee may sell.Renewal, Termination, Transfer and Dispute Resolution – this is typically the most complex section and details all contingencies and options for renewing, terminating, or transferring the business as well as mediation procedures for settling disagreements between the franchisor and franchisee.
17. Public Figures – describes any endorsement and compensation arrangements with public figures who are involved in promoting or managing the franchise.
18. Earnings Claims – the actual and projected estimated average earnings and how the figures are derived. Some franchisors do not furnish earnings estimates or projections. (The best source for this information is from franchisees already in operation!)
19. Outlets – lists all the franchises ever sold, currently in operation, company-owned units, and terminated franchises during the previous three years.
20. Financial Statements – most states require the franchisor to include audited financial statements, including a balance sheet for the past fiscal year, and income statements from the past three fiscal years.
21. Contracts – this is the actual Franchise Agreement, which should conform to all the stipulations outlined in the UFOC/ FDD. There will be some blanks that must be filled in, and then the Agreement is signed. 
22. Receipt – acknowledges that the prospective franchisee has received the UFOC/ FDD, but does not obligate the franchisee to sign the Agreement.

Some franchise agreements are set in stone, with no wiggle room for any deviation from the stipulations in the UFOC/ FDD. This is typical of large, well-known franchises. Smaller, start-up businesses may be more amenable to negotiating aspects of the agreement.

It is critical that you work with an attorney experienced in franchise law and agreements -- don’t rely on the lawyer who handled your house closing or divorce. Check out this page to find franchise lawyers and other great resources for prospective franchisees.

Also visit The Small Business Association web site which has an online “Franchise Workbook” with checklists to review before signing a Franchise Agreement.

Once you have thoroughly examined the UFOC/ FDD with your accountant and lawyer, and understand all the franchisor and franchisee obligations outlined in the UFOC/ FDD, you will be ready to sign the Franchise Agreement.