Many of the answers to the questions you have will be answered (although you will still need to double check and verify the information given) in the franchisor's disclosure document, sometimes called the Uniform Franchise Offering Circular (UFOC). The Federal Trade Commission, which regulates the sale of franchises, requires that certain information must be disclosed to potential franchisees before a contract can be signed or any monies paid. This information, contained in the disclosure document or the UFOC, must be given to the potential franchisee at the earlier of either (1) the prospective franchisee's first personal meeting with the franchisor, or (2) ten business days prior to the execution of a contract or payment of money to the franchisor.
The information contained in the disclosure document must be current as of the completion of the franchisor's most recent fiscal year. Additionally, a revision of the document must be prepared quarterly whenever there has been a material change in the information. Note that although the disclosure document is mandated by the Federal Trade Commission (FTC), the FTC does not verify the information it contains. The following notice, by the Federal Trade Commission, should appear on the cover sheet of the disclosure document.
INFORMATION FOR PROSPECTIVE FRANCHISEES REQUIRED BY FEDERAL TRADE COMMISSION
To protect you, we've required your franchisor to give you this information. We haven't checked it, and don't know if it's correct. It should help you make up your mind. Study it carefully. While it includes some information about your contract, don't rely on it alone to understand your contract. Read all of your contract carefully. Buying a franchise is a complicated investment. Take your time to decide. If possible, show your contract and this information to an advisor, like a lawyer or an accountant.
If you find anything you think may be wrong or anything important that's been left out, you should let us know about it. It may be against the law.
There may also be laws on franchising in your state. Ask your state agencies about them.
Federal Trade Commission
Washington, D.C.
In addition to the disclosure document, the franchisee must receive a copy of all agreements which he or she will be asked to sign.
The FTC does not require franchisors to make earnings claims; however, if such claims are made, they may be made only in accordance with the following standards: (1) a reasonable basis must exist to support the accuracy of the claim, (2) material sufficient to substantiate the accuracy of the claim must be in the franchisor's possession at the time the claim is made, and (3) the claim must be geographically relevant to the prospective franchisee's proposed location. In addition, any time an earnings claim is made, an earnings claim disclosure document must be furnished to the prospective franchisee at the same time that other disclosures are given.
Because of the abuses that sometimes occurred in the franchise industry, many states began to pass their own laws and regulations governing the sale of franchises. While most of these state laws and regulations were very similar to one another, each had their own provisions particular to that state. The effect of all this was franchisors who operated in more than one state (or who wanted to) had to comply with all the different laws and regulations of each state. The bureaucracy of all this was very costly and time consuming. These costs, of course, were ultimately passed on to the franchisee.
To correct this bureaucratic nightmare, a more uniform system of compliance was sought and ultimately adopted by the various states with registration and disclosure laws. What they came up with is known as the Uniform Franchise Offering Circular (UFOC). The UFOC is very similar to what the FTC mandates and is accepted by the FTC in place of its own disclosure document and by states which do not require separate registration. Since the UFOC is accepted by the FTC and by all the states, whether they require separate registration or not, over 99% of all franchisors follow the format of the UFOC instead of the FTC's disclosure document format.
New UFOC guidelines were adopted in April 1993 and went into effect no later than January 1, 1995. The most significant change is the way in which the UFOC is written. It is now mandated that it be written "...clearly, concisely and in a narrative form that is understandable by a person unfamiliar with the franchise business." In other words, it should be written in "plain English" rather than the legalese it was formerly written in. The following 23 items must be disclosed in the UFOC:
1. The Franchisor, its Predecessors and Affiliates
The first section will inform the prospective franchisee of the historical background of the franchisor as well as any predecessors. It should state the name of the franchisor, its predecessors and affiliates; the principal business address of the franchisor; the state of incorporation; whether the franchisor operates businesses of the type being franchised; the franchisor's other business activities; the business to be conducted by the franchisees; the general market for the product or service to be offered by the franchisee; a general description of the competition; and the prior business experience of the franchisor.
2. Business Experience
This section will list by name and position the directors, trustees, general partners, principal officers and other executives who have management responsibilities, and any franchise brokers. Each person's name, current position, and business experience for the last five years should be included.
3. Litigation
This section must describe any pending administrative, criminal or material civil action involving the franchisor, its predecessor, or any person identified in item 2. If such litigation is disclosed, the nature and location of the claim and the current status must also be stated.
Additionally, if the franchisor or any person identified in item 2 has during the past 10 years been convicted of a felony charge; been held liable in a civil action; or been the subject of a material action involving violation of a franchise, antitrust or securities law, fraud, unfair or deceptive practices, or comparable allegations; their name, the location, and the date of conviction must be disclosed.
4. Bankruptcy
The franchisor or any person identified in item 2 must disclose whether they have, in the past 10 years, filed for bankruptcy. If any of the people identified in item 2 were a principal in a company or a general partner in a partnership that filed for bankruptcy, this also, must be disclosed. The name of the person, company or partnership, the date of the action and other material facts must be stated.
5. Initial Franchise Fee
This section states the amount of the initial franchise fee and how it is to be paid - lump sum or in installments. If paid by installment, the terms can be disclosed here or in item 10. The conditions when this fee is refundable will also be stated here.
If the initial fee is not uniform, the formula used or the range of initial fees paid in the year prior to the application date and the factors that determined the amount must be disclosed.
6. Other Fees
All other fees or payments such as royalties, lease negotiation, construction, remodeling, additional training or assistance, advertising, audit, accounting or inventory, transfer and renewal fees should be disclosed. If any fee is refundable, the conditions when each fee is refundable should be stated.
