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Franchise Prospector » Research & Buying
Understanding the Uniform Franchise Offering Circular
Key UFOC Items
You may not wish to delve deeply into your UFOC right off the bat. If that's the case, here are the key items that you should be aware of.
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Item 1: The Franchisor and its Predecessors and Affiliates
This is where you learn the basic facts about the franchisor, including where it does business, what kind of product or service it plans to offer and whether or not any of the personnel have prior business experience in the field.
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Item 2: Business Experience
Here the franchisor must disclose the main occupations, past employers and details of the past five year's work for all officers, board members, executives, management and franchise brokers.
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Item 3: Litigation
This section discloses if the franchisor, its predecessors, the persons listed in Item 2 or any of their affiliates are presently involved in, or have been involved in, any litigation. If you do find several actions - especially where franchisees have sued the company-make a note and investigate it further.
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Item 4: Bankruptcy
Here, the franchisor must disclose any bankruptcy matters involving itself, its affiliates, its predecessors, its officers etc. that occurred within the past 10 years. Directors and other executives are not required to divulge this information, however.
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Items 5 & 6: Initial Franchisee Fee & Other Fees
This section summarizes the initial franchisee fee to be paid, ongoing royalty fees and any other charges you may be required to pay, such as group advertising costs and construction costs.
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Item 7: Initial Investment
This part discloses the franchisor's estimate of the typical total investment by the franchisee, in chart form. This information is key to preparing your own business plan or when you are financing the franchise.
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Item 8: Restrictions on Sources of Products and Services
This item tells you if franchisees are obligated to buy or lease products and services from the franchisor or from other designated suppliers. Basically, it tells you who you can buy from, where the suppliers are located and how much you have to purchase from these sources.
- Item 9: Franchisee's Obligations
Your obligations are listed here in table form and cross-referenced to the section of the franchise agreement and UFOC item where they are discussed. Your obligations may include such things as: selecting and acquiring your site, training, fees, standards and policies and sales quotas.
- Item 10: Financing
This outlines the terms and conditions of each financing arrangement that is offered to franchisees. Terms of each option may be laid out in a table for easy comparison.
- Item 11: Franchisor's Obligations
The longest section of the document, this portion outlines the franchisor's obligations to its franchisees, including assistance in locating a suitable site, hiring and training employees and offering products or services. This section also lays out the minute details of the franchisor's advertising program.
- Item 12: Territory
Here your territorial rights are revealed. This section also discloses if the franchisor can establish another franchise within your geographical area, either now or at some future date.
- Item 13: Trademarks
This is where you learn who owns the trademarks for the franchise and whether this trademark is protected. It also discloses the principal trademarks of the franchise which the franchisee will license for their own use.
- Item 14: Patents, Copyrights and Proprietary Information
Here you are told whether the franchisor owns the patents or copyrights that are material to the franchise and their plans (if any) to renew these. If this is confidential information, the franchisor must still disclose their general subject matter and the terms and conditions under which a franchisee can use this copyrighted information.
- Item 15: Obligation to Participate in the Actual Operation of the Franchise Business
This tells the potential franchisee whether they must personally participate in the operation of the franchise or if the franchisor simply recommends participation.
- Item 16: Restrictions on What the Franchisee May Sell
This portion describes the franchise system's product line and discloses any restrictions you might have on what goods and services you are allowed to provide.
- Item 17: Renewal, Termination, Transfer and Dispute Resolution
This reveals your rights to terminate, renew or transfer your franchise and also outlines the approved methods for resolving disputes and conflicts with the franchisor.
- Item 18: Public Figures
This section outlines the role of public figures in any franchisor marketing campaigns, including how the person is compensated and the total investment of the public figure in the franchisor. Remember-no matter how famous a celebrity is, their endorsement doesn't guarantee a franchisor's success.
- Item 19: Earnings Claims
This key section shows what kinds of sales or profits other franchisees in the system have made. It's important to note, however, that many franchisors don't reveal this information, as this is not required by UFOC guidelines. If no performance information is revealed, find out why. It could be that many of their franchisees are doing poorly or that there is a wide range of earnings between different areas.
- Item 20: List of Outlets
This item lists the statistical information for the entire franchise system, including how many franchise outlets are open and the names, addresses and telephone numbers of at least 100 franchisees and their sites. It also discloses how many outlets have been transferred, closed or terminated within the past three years.
NEXT: The Financial Statements
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