Presidential Secrets

Understanding the UFOC

"Keep your eyes on the stars, and your feet on the ground." -Roosevelt.
The UFOC is a composite document of three layers: the franchisor's audited financial statements, sample forms of all contracts you'll be asked to sign for the franchise and a 23-item narrative description of key areas of the franchise offering. It's designed by regulators to deliver the essential information any prospective investor should have in hand before buying a franchise, and it's chock-full of information you'll need to evaluate a franchise and compare its benefits and costs to other programs.

A disclosure document is easy to drop in the file and avoid. Read the UFOC! It'll teach you an enormous amount about the franchise program and the franchisor. Here's how the information in the UFOC is organized:

Items 1-4: Information about the corporate structure of the franchisor, its affiliates and predecessors, the business experience of the company's key executives and the litigation and bankruptcy history of the franchisor.

Items 5-7: The initial fees charged franchisees, other fees assessed during the course of the relationship and a chart showing the franchisee's estimated total investment to purchase the franchise rights.

Items 8-9: Summary of the franchisee's contractual obligations, with a chart cross-referencing important sections in the franchise agreement and a description of the purchasing requirements imposed on the franchisee.

Items 10-11:> A description of any financing provided by the franchisor, and a recital of the franchisor's contractual obligations.

Item 12: A description of territorial rights.

Items 13-14: Details of trademarks, copyrights and patents.

Items 15-18: Information regarding the franchisee's obligations to participate in the operations of the business; restrictions on what the franchisee may sell; renewal, termination and transfer provisions of the franchise agreement summarized in chart form, and a recital regarding any public figures used in the promotion of the franchise.

Item 19: Earnings claims. A franchisor may choose whether to provide performance information about its franchises, but it's not required to do so. If the company does make performance information available, it must be presented in this Item and have a reasonable basis at the time it's made.

Item 20: Statistics about the franchise system, company-owned units and franchised units. This Item provides the number of franchises broken down by state, shows the numbers that have been terminated or assigned and lists names, addresses and telephone numbers of both active franchisees and those who have left the system for any reason in the past fiscal year.

Items 21-23: Record of up to three years of audited financial statements, the franchise agreement(s) and the receipt pages for the UFOC.

The good news here is the UFOC is required to be written in plain English. Unless it's poorly prepared (and that does happen), it should be quite well organized and reader-friendly. Don't be put off by its length or weight-just dive into it and look over the offering. Expect to find no "parties-of-the-first-part," "heretofores" or "hereinafters" to numb the eye.

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This article was originally published in the January 2001 print edition of Entrepreneur with the headline: Presidential Secrets.

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