Myth vs. Reality

Myth #3:

The UFOC is a government-mandated, worthless boilerplate.

The UFOC, or Uniform Franchise Offering Circular, is a document franchisors are required to deliver to all prospective franchisees at their first serious in-person meeting or at least 10 business days before the deal is sealed. The UFOC's guidelines, which must be followed by franchisors, are government-mandated, listing in detail the questions to be answered and the information and contract forms to be included.

But the UFOC is an essential lifeline for investors. In recent years, the document's format has been changed so that it's now written in plain English. It's shorter than it used to be and provides a lot of key information in chart form. It contains a sample of each contract you'll be asked to sign and up to three years of audited financial statements for the franchisor. It's a treasure trove of investor information.

Failing to review the UFOC carefully is a big mistake. You need to know the franchisor's background, its bankruptcy and litigation history, and the experience of its executives. You need a summary of the fees you'll pay for the right to participate in the program, and you need to know the average total investment required. You need to know what restrictions are placed on your purchase of product supplies and your obligations under the franchise agreement. Is financing provided? On what terms? You need to know the legal status of the company's principal trademark and whether it's registered with the U.S. Patent and Trademark Office. The UFOC will also tell you if the franchisor chooses to deliver earnings or performance information about its system, and it gives a complete list of franchise owners in your area.

In a sense, the government has done some of the thinking for you by providing answers to the basic questions that all investors should ask (but may not think of) in the UFOC. The theory is that by having access to a UFOC, investors will be well-informed and make better investment decisions, and the marketplace will operate more smoothly. If there are risks lurking in a franchise program such as an unregistered trademark, a long bankruptcy history, a thinly capitalized franchisor, a propensity to litigate or a two-year trend of system shrinkage, then investors will be in a position to weigh those risks and act accordingly.

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This article was originally published in the October 1998 print edition of Entrepreneur with the headline: Myth vs. Reality.

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