Q: I just received a UFOC from the franchise I'm interested in buying, and I'm a little overwhelmed by all the information. Which items are most important to me? What specific information should I keep an eye out for?
A: There are 23 separate chapters plus exhibits in the UFOC format, and you should take the time to read the entire document. According to state and federal regulations, it must be written in plain English, so it's not quite as bad as reading a dense insurance policy. Here are some important sections and the red flags to watch for:
- Item 3 (Litigation): Don't expect a clean slate here; even the best franchisors carry the scars of our overly litigious society and must disclose certain cases against them for a period of 10 years. If the number of cases disclosed seems excessive, ask the company and the franchisees about the company's dispute resolution style.
- Item 7 (Initial Investment): This chart shows what you can expect to pay to get started in the franchised business you have chosen.
- Item 8 (Restrictions on Sources of Products and Services): This section is important because it may have a dramatic financial impact on your ongoing business operations. Make sure you understand these restrictions.
- Item 12 (Territory): Are your territory rights truly "exclusive"? Can the franchisor sell competing products to customers in your territory over the Internet? How near to you can the company establish another unit? Read this item carefully.
- Item 19 (Earnings Claims): Franchisors are allowed to reveal performance information about their franchised units, as long as it is disclosed in Item 19. If the information is limited in any way, you'll find the limitations described in a footnote. Don't read this section with stars in your eyes; check out real-world earnings by discussing it with existing store owners.
- Item 20 (List of Outlets): This item contains snapshots of the national franchise system, listing names, addresses and phone numbers not only of current franchisees, but also of those franchisees who have left the system for any reason in the past year. Call and visit as many as you can.
- Item 21 (Financial Statements) and Item 22 (Contracts): You will find up to three years of the franchisor's audited financial statements in Item 21. Review these with the help of an experienced accountant. Also, plan to go over the sample franchise agreement and other contracts in Item 22 with your attorney.
Q: I would love to talk to some people who have purchased one of these businesses and have already been through this experience. How do I approach them, and what would they feel comfortable discussing?
A: You'll find that most people love to talk about their business, especially with someone facing the same business decision they once made. Talking to franchisees is probably your best source of unvarnished information about the program. Find a quiet time to discuss the owner's experience, and ask about the training they received, the support provided by the franchisor, what they like and don't like about the business, and what the business grossed in the past year. Finally, ask them if, knowing what they know today, they would make the same investment decision again.
Q: I have never used the services of a lawyer, and frankly, the whole idea intimidates me. All I know about lawyers is that they are expensive. When do I need to hire a lawyer? Whom do I hire and how? What about an accountant?
A: Every small business, with rare exception, needs the assistance of an accountant and an attorney. The franchise and business opportunity purchase is a complicated transaction, and it's easy to get caught up in the excitement of a new business venture and lose sight of your own best interests. A good professional accountant and an attorney can help you early in the decision-making process. As soon as you close in on a program you want to pursue, it's time to locate and engage your professional team. Ask current franchisees or your friends in business whom they use. Sure, professional fees may seem expensive, but it may be the best insurance money you've ever spent. It can help you avoid even more expensive mistakes.
Andrew A. Caffey is an attorney in the Washington, DC, area and is the author ofFranchises & Business Opportunities: How to Find, Buy and Operate a Successful Business(Entrepreneur Press).