Analyze This

Unidentified Flying Circulars

You're offered a tremendous advantage as a prospective franchisee. Franchising law requires all U.S. franchisors to deliver a UFOC to prospective franchisees, at either the first personal sales meeting or at least 10 business days before a contract is signed or money changes hands, whichever comes first. This prospectus is a sandwich of three separate documents: a sample franchise agreement; three years' audited financial statements of the franchisor; and a 23-item narrative describing the franchisor, the franchise system and the franchise offered.

Here are some of the key program descriptions in the UFOC:

  • The franchisor's background, the experience of key executives and the company's litigation and bankruptcy history (Items 1 through 4)
  • All the fees charged by the franchisor (Items 5 and 6)
  • An estimate of total investment in establishing the business (Item 7)
  • Restrictions on the purchase of products to be used and sold in the unit (Item 8)
  • Financing that the franchisor makes available (Item 10)
  • A summary of the services, such as training and site selection, that the franchisor provides in relation to the franchise program (Item 11)
  • Territorial protections (Item 12)
  • The status of the trademarks, copyrights and patents associated with the program (Items 13 and 14)
  • A description of how well the franchises perform financially (Item 19)
  • System statistics and lists of franchisees and former franchisees (Item 20)

Overcome your inclination to toss this imposing document aside. Read it! Highlight any statements you don't understand or that raise questions in your mind, and plan to follow up with the franchisor's sales rep or your advisors.

Reading the UFOC is only the first step in your investigation. There's much important information that can't be found in the UFOC, and the only way to ferret it out is by asking a lot of questions. This step--taking the time to look behind the paperwork--separates the casual, clueless investors from the real entrepreneurs.

The other information you need to find out includes:

  • Is the market for the product or service of the franchise program strong, or is it declining?
  • Is there an independent franchisee association in the system?
  • How does the franchisor handle competition issues between its franchisees?
  • What were the typical store sales last year, and what is the range of sales?
  • What process has the company put in place for the governance of the system? Do franchisees have a say in the development of new products or services?

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This article was originally published in the January 2000 print edition of Entrepreneur with the headline: Analyze This.

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