Franchise Buying Guide

Information Please

Do The Paperwork
Presented by Guidant Financial
Guidant Financial specializes in helping entrepreneurs purchase new franchises using their retirement funds.

Buying a franchise involves a unique set of paperwork that the franchisor is required by law to deliver to each prospective franchisee at least several weeks before the purchase closes. Known as the Uniform Franchise Offering Circular (UFOC), this document contains information that's invaluable to your research.

Franchisors' UFOCs aren't difficult documents to consume, but they're not an easy read either. The key is to understand what you're looking for and why. A UFOC is a sandwich document with three layers of information. The top layer is an extensive narrative about the franchise program that's organized into 20 sections, or "items." The second layer contains three years of audited financial statements from the franchisor. The final layer contains copies of the agreements that franchisees are expected to sign. Let's take them one layer at a time:

  • The narrative. The 20 items of narrative are the mother lode. They deliver a detailed description of the franchisor and its franchise offering. Among the section's treasures: a discussion of the franchisor's history and the experience of its key executives (see Items 1 and 2); the company's litigation and bankruptcy history, if any (Items 3 and 4); the fees you'll pay and the company's estimate of your total financial investment (Items 5, 6 and 7); information about any product restrictions, trademarks and services (Items 8 through 18); the earnings potential of an individual franchise (Item 19); and statistics about the franchise system (Item 20).

The scope of the information you'll find in the UFOC is one of the more satisfying aspects of the research process. This document gathers, in one place, information that would take weeks to assemble on your own--if you could find it at all. The entire document is important reading for you if you're at all serious about a franchise program.

  • Franchisor financials. The second layer of financial statements (Item 21) reports the financial standing of the franchisor. The fact that three years of the company's financial life are audited by an independent CPA generally ensures reliability. If you're uncomfortable reading and interpreting financial statements, hire a good accountant to help you determine the franchisor's financial standing. After all, if you're signing a franchise agreement with a 10-year term and a 10-year renewal term, you want to make sure the company will be alive and kicking for that length of time. Does the company have the capital to make it in the long run? It's important to find out before you sign on.
  • Franchise agreements. Item 22 contains copies of sample contracts proposed for signature. Take a close look at the franchise agreement, typically a complex contract. It's designed to govern a continuing commercial relationship that can last five, 10 or 20 years--or even longer. It licenses the franchisor's intellectual property (trademarks, trade secrets, copyrights and patents) for you use. Among legal contracts, franchise agreements are right up there on the complexity scale with commercial leases; they should be reviewed with the same careful eye.

Before signing a franchise agreement, ask a competent lawyer to look it over for you. He or she can explain how the relationship will work and whether any provisions go against your best interests. Contrary to the impression conveyed by the heft of the "standard" documentation, franchise agreements are negotiable. If there's a provision that you and your attorney don't like, explore alternatives with the franchisor. Franchising isn't a one-size-fits-all situation.

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