Hey, Get a Clue!

Find out why the Uniform Franchise Offering Circular has been a franchisee's best friend for 25 years.

If you're seriously considering purchasing a franchised business, you have a marvelous advantage over buyers of independent businesses: You receive a Uniform Franchise Offering Circular (UFOC) from the franchisor at least a couple of weeks prior to closing on your purchase. This document is designed to make your franchise investment a fully informed decision, and for prospective franchisees, it's worth its weight in Big Macs.

Since 1979, federal franchise law has required franchisors in the United States to deliver this document to all prospective franchisees. The fundamental pre-sale disclosure approach to franchise sales regulation hasn't changed in 25 years, but the UFOC has changed considerably over that time.

Here's what hasn't changed: The UFOC is still a sandwich of three important components: 1) a 23-item narrative disclosure describing various aspects of the franchise offering, 2) up to three years of the franchisor's audited financial statements, and 3) the franchise agreement form and other contracts you're required to sign to become a franchisee.

The UFOC was actually written and first published in 1975 by the Midwest Securities Commissioners Association, predecessor to the group that now periodically reviews and publishes the UFOC, the North American Securities Administrators Association. The disclosure format was created in response to the disparate disclosure requirements that an increasing number of states were adopting in the early 1970s. Since then, the UFOC has been embraced by all the state and federal authorities regulating franchising in the United States, and it has been imitated by a dozen different countries around the globe that now regulate franchise sales.

This author was just emerging from law school and testing his wings as a lobbyist for the franchise community. At about the same time, the FTC was considering its now well-established Franchise Rule, which requires delivery of a disclosure document for every franchise transaction in the country.

Within the 25 years since the FTC adopted it, the UFOC has helped countless investors, and regulators have tweaked its design so it's an even better investor tool than when it was originally designed. In that time, I have written dozens and dozens of UFOCs for my franchisor clients, and I've always felt some sections of the UFOC contained vital investor information, while others were less important. I'm also convinced key pieces of information about the franchise and its systems do not appear in the UFOC. It's by no means a perfect document and should not be relied on to the exclusion of other research steps that all franchise investors are well-advised to take, such as interviewing existing franchisees.

Still, in 2004, it has never been more important to carefully review and understand the UFOC before buying a franchise. It may be cold comfort as you sit down to read this thick prospectus, but you're far better off than a 1979 investor in at least one important aspect: Since the 1993 revisions to the UFOC guidelines, the disclosure documents must be written in "plain English." In the past decade, an entire generation of franchise attorneys (including yours truly) had to break a lifetime of outdated UFOC writing habits. It wasn't pretty. To give you an idea of what my colleagues and I were up against, the 1993 plain-English rules prohibited the use of any word or phrase appearing on a long list of 60 "legal antiques," which included obvious legalisms such as "condition precedent," "hereinafter," "heretofore," but also included some perfectly serviceable (and plainly understood) words and phrases such as "commence," "so long as," "relating to," "on behalf of" and "prior to." In the 1990s, armed with this list, state franchise examiners became scolding schoolmarms fussing over the banned words and phrases, with franchise attorneys as their reluctant pupils.

In desperation, some California franchise regulators started requiring submission of the word processing file of the UFOC narrative so they could pull it up and, with far too much relish, edit out all the passive voice writing and specific legalese that the new UFOC guidelines banned. They would then e-mail back your UFOC, bleeding from every section with redlined revisions. But the result is a document that's far more readable in 2004 than the turgid tomes we turned out in the 1980s.

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This article was originally published in the January 2004 print edition of Entrepreneur with the headline: Hey, Get a Clue!.

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