Buying a Franchise is often an attractive investment for many people to earn good returns on a regular basis. Franchise, in simple terms, is a license granted by a Company to carry out business under its brand name. Thus, food outlets like Burger King, Subway give out their franchise to potential buyers.
What is UFOC?
Uniform Franchise Offering Circular (“UFOC”) is a document that every person who wishes to purchase a Franchise shall go through. The Uniform Franchise Offering Circular is a document that contains all the vital information about the Franchise model. It is regulated by the rules made by the Federal Trade Commission’s Franchise Rule. Several countries in the world have made specific laws to deal with the working of Franchise businesses in their respective countries. The USA has a Federal Trade Commission which regulates the Franchise business. Unfortunately, India doesn’t have separate legislation to regulate the Franchise Business. It is regulated by the Franchise Agreement itself.
Purpose Behind UFOC
The Franchise Rules set out by the Federal Trade Commission mandates full disclosure of information about investing in Franchise Business. The details set out in the circular help the potential buyers to identify the business. This way, a buyer can decide whether to invest the money in the franchise or not.
The term ‘uniform’ plays a vital role as the franchises can’t change the terms and conditions of the UFOC. This helps the buyers to understand the entire business of the franchise (such as the expenses, future plans, Financial Statements, and various other obligations). It is given to the buyer before signing the Franchise Agreement and the payment thereof. Thus, a buyer should carefully read all the terms and conditions set out in the Uniform Franchise Offering Circular and understand it properly.
The UFOC is monitored and administered by the North American Security Administrator Association (NASAA). To avoid any loss to the prospective buyer, the Federal Trade Commission made it mandatory for the UFOC document to be in plain English rather than complex legal language to be understandable for a layman.
If we go through the Compliance Guide of Franchise Rule formulated by the Federal Trade Commission of USA, we will find details about the Disclosure Document and all the 23 items which need to be disclosed to the Franchise buyer.
Under the Franchise Rule enforced by the FTC, the buyer must receive the document at least 14 days before the buyer is asked to sign any contract or pay any money to the franchisor. The buyer has the right to ask for a copy of the Franchise Disclosure Document.
Some of the important items out of those 23 items of the Disclosure Document are as follows:
ITEM 1: Franchises Background
Item 1 tells us about the entire history of the Franchise Business, i.e., How long the franchise has been in the market, who all are the competitors to the franchise. For example: If a person wants to buy a McDonald’s Franchise, item 1 will contain the date on which it was founded [i.e., 1955 (66 years)], its competitors (Burger King, Dominos, etc).
ITEM 2: BUSINESS EXPERIENCE
Item 2 contains business experiences of certain important individuals, which may include Directors, MD, Principal officer, etc. Such experience gives an idea about who is running the business and is the person is capable enough to run it or not.
ITEM 3: LITIGATION HISTORY
Item 3 discloses all the lawsuits to which the franchisor or any of its executive officers are parties.
ITEM 4: BANKRUPTCY
Item 4 discloses whether the franchise, its affiliate, or any of its executives have been subjected to Bankruptcy. If yes, the buyer must carefully look at the Financial Statements of the Company of the last few years and check whether the business is in stable condition or not.
ITEM 5 & 7: INITIAL AND OTHER COSTS:
This item discloses some pre-commencement franchise costs. Generally there is no Initial cost to the buyer before starting a business but if some franchise wishes to charge cost, they must disclose it in item no 5. It also explains other fees like royalties and advertising fees., training fee etc. The franchise shall also disclose the estimated initial franchise investment to the buyer.
ITEM 8,12 & 16: SUPPLIER, TERRITORY & CUSTOMER RESTRICTION:
This item contains all the restrictions imposed on the franchisor. The limits include suppliers from whom one may purchase goods or the goods or services one may offer for sale etc. Such restrictions may limit your ability to carry out the Franchise Business.
ITEM 11: ADVERTISEMENT AND TRAINING
Franchisees are often required to contribute a percentage of their sales to ads and the training of their employees to run a business. Such costs have to be disclosed under this head.
ITEM 13 & 14: TRADEMARKS AND PATENTS
The franchise must disclose all kinds of Intellectual Properties they owe.
ITEM 17: RENEWAL, TERMINATION AND DISPUTE RESOLUTION
The item will tell you about the terms of renewal, conditions for termination, and if there is a dispute between the Franchise owner and franchisor, how the dispute can be resolved.
ITEM 19: FINANCIAL PERFORMANCE
You can track the financial performance of the company under this item head. It is really important for any potential buyer to go through this item in order to make future decisions about investing in the Franchise Business. Poor Financial performance should be a big cross, and buyers shall not invest in such companies.
ITEM 20: OUTLETS AND FRANCHISE INFORMATION
Item 20 requires the disclosure of statistical information on the number of franchised outlets and company-owned outlets for the preceding three-year period. If the charts show more than a few franchised outlets in your area have closed, transferred to new owners, or transferred to the franchisor, it could be due to problems with the franchisor’s support or because franchises aren’t profitable.