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.
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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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