OVERVIEW OF UNIFORM FRANCHISE OFFERINGS CIRCULAR (UFOC)

Franchisors in the process of drafting their first ever franchise agreements and disclosure documents may choose between the Uniform Franchise Offerings Circular (UFOC) format first adopted by the predecessor to the North American Securities Administrators Association (NASAA) or the format described in the FTC Franchise Rule. Although familiarity with both formats is a good idea, most franchisors choose the UFOC format because of its acceptance among state regulators. As noted above, the UFOC format satisfies FTC requirements. A significant difference between the two formats, especially for startup franchisors, is the requirement for audited financial statements. The UFOC format requires that audited financial statements be included with the offering circular. The FTC Franchise Rule format does not require audited financials. Startup franchisors often do not have audited financials and wish to avoid the expense of having them created. Some state regulators may accept a UFOC format disclosure without audited financials from a startup franchisor, but the technical requirements of the UFOC format provide no such dispensation for startups. A new franchisor, therefore, may choose to use the FTC Franchise Rule format. Note, however, that this may prevent the disclosure from being accepted in certain registration states. Whatever the reasons, the vast bulk of franchisors today are using the UFOC format.

The UFOC format requires that franchisor to provide information pursuant to detailed guidelines organized in twenty-three parts. Briefly that information appears in the items or sections listed below which make up a UFOC:

Item 1. The Franchisor, Its Predecessors and Affiliates
Item 2. Business Experience
Item 3. Litigation
Item 4. Bankruptcy
Item 5. Initial Franchise Fee
Item 6. Other Fees
Item 7. Initial Investment
Item 8. Restrictions on Sources of Products and Services
Item 9. Franchisee's Obligations
Item 10. Financing
Item 11. Franchisor's Obligations
Item 12. Territory
Item 13. Trademarks
Item 14. Patents, Copyrights, and Proprietary Information
Item 15. Obligation to Participate in the Actual Operation of the Franchise
Item 16. Restrictions on What the Franchise May Sell
Item 17. Renewal, Termination, Transfer and Dispute Resolution
Item 18. Public Figures
Item 19. Earnings Claims
Item 20. List of Outlets
Item 21. Financial Statements
Item 22. Contracts
Item 23. Receipt

As you can see, the UFOC contains an enormous amount of information about the franchisor's offering. Some would argue that the regulations originally conceived to protect prospective franchisees by requiring full disclosure have actually placed a very strong tool in the hand of the franchisor. When a franchisee and franchisor end up in a dispute the very detailed disclosures made by the franchisor in the UFOC often provide an excellent defense against the franchisee's claims that he was misled. The franchisor can go to court against its disgruntled franchisee with a signed receipt showing that the franchisee received a more comprehensive disclosure than a small business buyer might typically be able to access in even a comprehensive due diligence inquiry. The bias of many franchisors -- and of course of their lawyers -- is for over disclosure. Prudent franchisors include all of the "bad news" that might conceivably be required by the regulations and guidelines. Out of an excess of caution, franchisors tend to state their disclosures in a very conservative fashion. Sales representatives then have to answer difficult questions posed by prospective franchisees, but the result tends to be a fair and open exchange of information.

Franchisors are well advised to think of the UFOC not as a sales tool but as a risk management tool. When a franchisor takes the approach that it only wants to do business with prospective franchisees who are fully informed, the credibility gained through openness becomes an excellent selling point.

Prospective franchisees are well advised to study the UFOC very carefully. Catalog the disclosures that are confusing, that seem troubling or that describe contract terms that are onerous. Discuss these issues with current and former franchisees in the system. They can be found in Item 20 of the UFOC. Discuss these issues with counsel experienced in franchise matters. The UFOC is not a complete guide to due diligence for a prospective franchisee, but it is an enormously useful tool in that process. Sometimes the size of the document itself is daunting, but it is a mistake to allow this wealth of information to go uninvestigated.

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