Learning about franchise documents
When you become interested enough in a franchise opportunity to start gathering information and beginning discussions with a prospective franchisor, you will need to be more familiar with two important documents – the offering circular and the franchise agreement or contract. By learning more about both of these documents and the details they require, you will be better prepared to investigate potential franchise opportunities.
The Uniform Franchise Offering Circular
The Federal Trade Commission (FTC) implemented a 1978 federal rule by amendment that required franchisors to present would-be franchisees with a disclosure statement, also known as a uniform offering circular, which contains certain information regarding a franchise.
This existing FTC rule was substantially modified the 1995 rule. Therefore, franchisors in all 50 states starting in July 2008 are required to provide prospective franchisees with a revised Uniform Franchise Offering Circular (UFOC), which will be titled “Franchise Disclosure Document” UFOC.
Specifically, the franchisor, prior to July 2008, must provide you with a Uniform Franchise Offering Circular at the earliest of three times:
- At the first face-to-face personal meeting between you and the franchisor or at the time for making disclosures regarding the terms and conditions of the sale of the franchise
- 10 business days before you make any payment to the franchisor
- 10 days before you sign any contract committing you to buy the franchise or any other agreement imposing a binding legal obligation on you
The new amended rule changes the time from 10 business days to 14 calendar days before a prospective franchisee may sign any binding agreement or pay any consideration for the franchise after the mandatory July 1, 2008 effective date.
In addition, the pre-July 1, 2008 FTC amended rule requires all franchisors to furnish you with completed copies of the documents to be executed at least five days before you sign on the dotted line. The amended rule changed the time required by the FTC Rule from five business days to seven calendar days but only if the franchisor unilaterally makes changes. Also, the amended Rule allows for electronic delivery of the UFOC and electronic signatures.
Examine the Uniform Franchise Offering Circular very carefully, even if you have gleaned information on your own regarding a particular franchisor and his or her franchise offering.
After receiving an offering circular, try to personally do a field investigation of all the franchises offered in the field of your choice, and compare franchisors doing business in the same area. To do a field investigation, check with the current franchisees:
- Ask about their experiences with their franchisor and whether the franchisor has carried out the representations made in the circular and the franchise agreement.
- Find out whether or not the franchisor keeps his or her promises.
- Try to discern the attitude of the current franchisees regarding the major people in the franchisor’s hierarchy of personnel.
- Find out whether the franchisees feel that their franchise opening costs were more than what the franchisor estimated they would be.
- Determine if the franchisor provided the franchisees with adequate training or left them on their own.
- Remember competitors of a franchisor will generally be more than happy to give you all the “dirt” about that franchisor. The same is true of current franchisees. If they have a gripe against their franchisor, they will be first to tell you in no uncertain terms.
Once you have completed your field investigation, you will be better informed when examining the offering circular or prospectus. Remember, if you don’t get an offering circular from a franchisor, there is something wrong: for example, your franchisor may have violated an act enforceably by the FTC or a state agency or both.
