As an investor in a franchised business, you enjoy a huge advantage: The franchisor is required to deliver to you a meaty disclosure statement well before you commit to the investment. It's known as a Uniform Franchise Offering Circular, a disclosure document or an offering prospectus, and it's a treasure trove of information for any curious traveler. It must be delivered to you at the earlier of: 1) your first personal meeting to discuss the franchise investment (routine trade show encounters over an exhibition booth generally do not count) or 2) at least 10 business days before you pay money or sign a contract for the franchise. Note that the law does not require a franchisor to deliver its UFOC to you when you request one, but you will certainly see it if you attend a hospitality suite meeting at the trade show convention center or if you visit the company headquarters to explore the program. At the same time, it never hurts to request a copy as soon as you decide you're interested in looking at the offering in more depth.
Take the time to read the UFOC; it's remarkable how many people don't. It's written in plain English, not dense, off-putting legalese. It's also laid out in logical fashion. You'll find three basic sections of the UFOC: 23 items of narrative discussion of the franchise offering, financial statements of the franchisor audited by an independent CPA, and a copy of the franchise agreement form you'll be asked to sign.
The 23 narrative items discussing the franchise are organized into these rough information categories:
- Items 1-4: The franchise program, the franchisor, the business experience of key franchisor personnel, and the franchisor's litigation and bankruptcy history
- Items 5-8: Fees to be paid to the franchisor, an estimate of your total investment in establishing the franchised business, and the requirements to purchase from the franchisor and/or approved suppliers
- Item 9: Your obligations under the franchise agreement summarized in chart form
- Item 10: Details of any financing provided by the franchisor
- Item 11: A lengthy recital of the pre-opening and post-opening obligations of the franchisor
- Item 12: Territorial rights
- Items 13-14: Trademarks, patents, copyrights and proprietary information
- Items 15-16: Your obligations to participate in business operations, and restrictions on what products and services the business may offer
- Item 17: A summary in chart form of renewal, termination, transfer and dispute resolution under the franchise agreement
- Item 18: Details of the franchisor's use of a public figure in the promotion of the franchise
- Item 19: Performance data and earnings claims, if the franchisor has provided any
- Item 20: Summary of the franchisees who have entered or left the system in the past year, the company-owned units and the franchisor's expansion plans for the coming year. Also, a complete list of the names, addresses and telephone numbers of regional franchisees
- Items 21-23: The financial statements, franchise agreement form and the receipt for the UFOC (which you will be asked to sign, date and return to the franchisor)
Professional Travel Guides
Before you sign anything, have an accountant and an attorney look over the franchisor's financial statements, the Items 5-7 fee charges and investment estimates, and the franchise agreement. Sure, it'll cost you a few hundred dollars, but think of these fees as a toll on the bridge to franchise ownership. The value of the financial planning, the insight into the franchisor's financial standing and the understanding of the legalitites of the franchise agreement will be worth it to you. And if Uncle Leroy comes through with any financial backing, he'll insist on a professional review of the program.
Hit the Road, Jack
After you've reviewed the UFOC and drilled the franchisor representative with questions, it's time to travel (literally) to existing franchisees. Look them up in Item 20 of the UFOC; get in the car and go. Watch their operation for a while, and ask for a 30-minute personal meeting with the owner when it's convenient.
Visiting with an existing owner is a golden opportunity to explore whether this franchise is the right investment for you by testing it against the experience of others. Be prepared to run down several key questions with the franchisee, including: "Is your business strong, and if not, how could it be improved?" "Did the franchisor do what it promised to do?" "Was the training valuable?" "What were your business's gross sales last year and is this a stronger year?" And the clincher: "Knowing what you now know, would you make the same decision to buy this franchise?"
Following a road map makes the trip more satisfying. You can better appreciate the sights and information you find along the way, and you increase your odds of arriving at a business that meets your needs. That is the very definition of the road to business success.
|Franchise sales are regulated at the federal level by the Federal Trade Commission, and at the state level by a number of states. Your local Better Business Bureau (BBB) can also be helpful, telling you whether the company has a high number of complaints on file that it hasn't resolved. It's a good idea to have the BBB's contact information in your knapsack.|
Andrew A. Caffey is a practicing franchise attorney in the Washington, DC< area; an internationally recognized specialist in franchise and business opportunity law; and a former General Counsel of the International Franchise Association.