What is a UFO?

The UFOC was a response to unethical behavior in the 1960s and 1970s. Today franchises are regulated by law. The Federal Trade Commission (FTC) requires certain information to be disclosed to prospective franchisees before a contract can be signed or any payment made. The information is presented to the potential franchisee in the form of a document: the UFOC.

The FTC requires franchisors in all states to provide a UFOC. Additionally, some states require that the offer must first be approved and registered by the state before it can be promoted to potential franchise buyers. These states include: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin. Certain states, such as Illinois and Minnesota, have even more stringent requirements for the franchisor. This, in turn, offers better protection for the prospective franchisee.

What does the UFO contain?

The UFOC contains 23 items of information that must be current as of the end of the franchisor’s most recent fiscal year. If there is a material change to the information in the document, the franchisor must do a review (to be issued quarterly). The disclosure document must be delivered to a prospective franchisee at the earlier of: the first personal meeting of the franchisor and the prospective franchisee or ten business days before the execution of a contract or payment of money to the franchisor.

UFO Standard Items:

1. The franchisor, its predecessors and affiliates

2. Business experience

3. Litigation

4. Bankruptcy

5. Initial Franchise Fee

6. Other fees

7.Initial investment

8. Restrictions on the sources of products and services

9. Obligations of the franchisee

10. Financing

11. Obligations of the franchisor

12.Territory

13. Trademarks

14. Patent, Copyright and Proprietary Information

15. Obligation to Participate in the Real Operation of the Franchise Business

16. Restrictions on what the franchisee can sell

17. Renewal, termination, transfer and dispute resolution

18. Audience figures

19. Earnings Claims

20. List of outlets

21. Financial Statements

22. Contracts

23. Receipt

How do I use this franchise document?

The UFOC is similar to a securities prospectus. It can provide the information you need to evaluate a company or target potential sales customers. A reputable franchise company, whether publicly traded or privately owned, must provide this disclosure document.

The UFOC is most valuable to potential franchisees, prospective franchisors, franchisors, investors, finance companies and franchisees’ vendors.

Standard UFOC Items Description:

1. The franchisor and any predecessor. This section contains historical background material on the franchisor as well as any predecessors. Includes corporate and trade names, address and principal place of business. A description of the franchise should include information such as the nature of the franchise and the business experience of the franchisor, including direct experience in a franchise.

2. Identity and business experience of the people affiliated with the franchisor. All names of persons who have significant responsibilities in the operation of the business or in the support services provided to franchisees must be disclosed. Also included is information indicating the individual’s current position with the company and business experience for the past five years. If a marketing representative or franchise broker is involved, the same information is required.

3. Litigation history. Detailed information on criminal, civil and administrative litigation involving any of the company’s officers, owners, directors or key executives is disclosed in this section if the allegations or proceedings involve the prospective franchisee.

4. Bankruptcy history. The franchisor must disclose whether the business or any of its directors or officers has filed for bankruptcy within the last 15 years. Information about each action should be included.

5. Franchisee’s initial franchise fee and/or other initial payment. This section establishes the franchise fee and any other initial payment that must be made by the franchisee at the time of execution of the franchise agreement. The section discloses the payment terms and fees, the use of such money, and whether the payment and fees are fully or partially refundable.

6. Other charges. All other fees are itemized, including royalties, advertising fees, insurance costs, training costs, auditing and accounting costs, consulting, leases, modification costs, and any other fees associated with the franchise.

7. Estimated initial investment of the franchisee. Estimated expenses associated with opening a franchise are counted with a high and low range given for real estate, construction, equipment, fixtures, permits, furnishings, signage, inventory, working capital, etc. This section must include the name of the person or persons to whom the payment is made for the above, under what terms and if reimbursement terms apply.

8. Obligations of the franchisee to buy or lease from designated sources. Any requirement that the franchisee purchase goods, services, supplies, equipment, or insurance for the opening and/or operation of the franchise from a source designated by the franchisor must be disclosed. Franchisors must also disclose whether they receive income from approved vendors as a result of franchisees’ purchases.

9. Obligations of the franchisee to buy or lease according to specifications or from approved suppliers. A more detailed elaboration on sourcing supplies, this section details any franchisee’s responsibility to purchase or lease, either from pre-approved vendors or in accordance with the franchisor’s specifications. Specifications for purchases are not normally included, but prices, discounts and procedures for the franchisor to approve suppliers are usually quoted.

10. Financing agreements. All financing programs offered by the franchisor or its designees are described in this section.

11. Obligations of the franchisor: other supervision, assistance or services. This section describes the initial and ongoing services and support of the franchisor. It is often divided into two parts: service obligations of the franchisor and services that can be performed by the franchisor. Some types of service and support described are training, advertising material, site selection, market research and computer services.

12. Land rights. If the franchisor grants exclusive rights, the territory and rights will be described in this section. The conditions that the franchisee must meet to retain these rights, as well as the right of the franchisor, are also disclosed.

13. Trademarks, service marks, trade names, logotypes and trade symbols. The franchisor must disclose information regarding the registration of trademarks, service marks, trade names, types of logos and trade symbols with the US Patent and Trademark Office. Also included is a list of states and countries in which trademarks are registered, as well as any limitations imposed on the franchisee for the use of these trademarks.

14. Patents and copyrights. This disclosure lists patents and copyrights that may be involved in the operation of the franchise and which may cover trade secrets and confidential information.

15. Obligation of the franchisee to participate in the operation of the franchise business. If the franchisor requires the active participation of the franchisee in the operation of the business, this must be stated. The terms and conditions of participation must be defined.

16. Restrictions on the goods and services offered by the franchisee. The limits or exclusions on the goods and services that can be marketed by the franchisee are established in this section.

17. Renewal, termination, repurchase, modification and assignment of the franchise agreement and related information. This, the longest and most complex section, covers the franchisor’s requirements and franchise options when a franchise is to be renewed, terminated, repurchased, modified or relinquished.

18. Arrangements with public figures. If the franchisor has any compensation or endorsement program with a public figure, he must make it public. If the public figure is involved in owning or managing the franchise, that must also be disclosed.

19. Actual, average, projected or forecast sales, profits or franchise earnings. There is an option here. Some franchisors will state that they do not provide actual, average, projected or forecast sales and earnings to prospective franchisees. If a franchisor makes a claim of sales, profits, or earnings, then the franchisor must fully describe the method by which the claim is made.

20. Franchisor Franchise Information. The franchisor provides a summary of franchises sold, the number actually in operation, the number of agreements signed but not in operation, and the number of units owned by the business. Information is also required on the number of franchises terminated or not renewed with the causes of termination or non-renewal in the last three years.

21. Financial statements. In this section is a complete set of financial statements, usually a balance sheet for the last fiscal year, an income statement, and changes in the financial position of the franchisor during the last three fiscal years. Most states require audited returns.

22. Franchise Agreement and Related Documents. A copy of the franchise document and any other document that must be signed by the franchisee must be included as annexes.

23. Acknowledgment of receipt by a prospective franchisee. Prospective franchisees must sign an acknowledgment that a disclosure document was received from the franchisor.