Head of the Class

Lesson 3: Information, Please

A big part of the challenge of looking into a franchise is getting your hands on information. I've got some good news: The franchisor is required to package the key investment information and hand it to you in a document called a Uniform Franchise Offering Circular (UFOC). It spoon-feeds you some basic information about the franchise investment.

The first thing to understand about the UFOC is that it's actually three documents sandwiched together: 1) a 23-item narrative about the franchise offer, 2) up to three years of audited financial statements of the franchisor, and 3) the form of franchise agreement you'll be asked to sign. If you're serious about a particular program, you should carefully read this document. It's amazing how many franchise investors don't bother. It's required by law to be written in plain English, so don't be intimidated. I can tell you that every student who's completed this class has read the UFOC and understands its limitations and strengths.

First, look at the UFOC's attachments. You may have no experience reading a commercial contract or a set of financials, but these will be indispensable to your professional advisors. Take the contract to a good business attorney; let your counselor look through it and explain it to you. If you and your attorney conclude there are points you can't live with, explore negotiating with the franchisor.

Take the financial statements to an accountant trained to evaluate all those numbers. Your basic questions: Does the franchisor have the financial wherewithal to meet its commitments under the franchise agreement? And will it be around for a while? Your accountant can also use Item 7 information to advise you on your own financial planning for the investment.

Do Your Homework
  • Visit current franchisees. Ask what they like and dislike about the business, how much they made last year, and if they would make the investment again.
  • Hire a good attorney and accountant. This may seem like an extravagance, but it's money well spent. An attorney will explain the franchise agreement and discuss what provisions you may want to negotiate with the franchisor; and an accountant will give you an idea of the franchisor's financial standing and do financial planning for your business.
  • Visit the franchisor's headquarters. You'll learn a lot about the company just by seeing the operation and meeting the team.
  • Check with the Better Business Bureau. Go to www.bbb.org, or locate offices in the phone book. Find out if there are any complaints filed against the franchisor.
  • Contact your state attorney general's office. This is the office most likely to regulate franchising if it's regulated in your state. The states that regulate it are: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin.

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This article was originally published in the September 2004 print edition of Entrepreneur's StartUps with the headline: Head of the Class.

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