A Closer Look

What's The Scoop?

All franchise programs are required by law to provide investors with a Uniform Franchise Offering Circular (UFOC). The UFOC offers you a bonanza of information: Everything from the background of the franchisor's executives to the financial details of the investment is laid out in plain English.

However, when you're dealing with a new franchisor, the UFOC can leave you wanting more information. Expect to see all zeros in the Item 20 charts describing the system, and perhaps nothing more than an audited opening balance sheet for the company's financial statements. The business history of the new franchisor may be nothing more than the fact that it was recently incorporated. The list of franchisees in Item 20? There may not be any to list, meaning you can't contact people who've already invested to see how they've fared.

But a new franchisor's UFOC still contains extremely valuable information. It will show you, for instance, whether any of the franchisor's key players have been involved in a bankruptcy or a material litigation in the past 10 years. The estimated cost of the franchise is spelled out in Item 7, and the fees you will pay to the company are detailed in Items 5 and 6.

Ask the franchisor's representative what experience the franchisor has had operating similar businesses or company-owned locations of the franchise. How long have they been operating these businesses? How many are there? How are they run? Plan to visit one of these locations to learn as much as possible about the business.

A visit will also give you an idea of how well the business is doing. "Is it making money?" and "How much money can a franchisee make?" are questions a new franchisor probably can't answer. Earnings information is carefully regulated by franchise laws, and often, a new franchisor simply doesn't have performance data available on which to reasonably base an earnings statement. If the franchisor makes any performance information available, it will appear in Item 19 of the UFOC. You should also review the audited financial statements with your own accountant.

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This article was originally published in the November 1998 print edition of Entrepreneur with the headline: A Closer Look.

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