A Uniform Franchise Offering Circular (UFOC), now dubbed a Franchise Disclosure Document (FDD), is a disclosure document that the Federal Trade Commission (FTC) requires franchisors to provide potential franchisees before bestowing a franchise.

What Must Be Disclosed in the UFOC?

Some basic disclosures that must be made in the UFOC are:

  • A description of the business and any management and partners who would have management responsibilities over the franchisees.
  • Any litigation or bankruptcy hearings that have taken place in the last ten years concerning the franchisor or affiliates.
  • The franchisee must make all payments to open and continue running the franchise branch.
  • An estimation of the initial investment the franchisee will have to make, along with any purchases that must be made according to the franchisor’s estimates.
  • The duties and obligations of the franchisee under the agreement.
  • The duties and obligations of the franchisor under the agreement, including any funding the franchisor will provide the franchisee.
  • The location of the franchise and a description of the territory.
  • Limitations on the franchisee, including what may be sold and who it may be sold to.
  • The length of time of the franchise license and the renewal process, if any.
  • Contact information and fiscal performance records and expectations for at least 100 other franchisees.
  • Financial records for the past two fiscal years.
  • Samples of all agreements the franchisee must sign.

There are 550,000 franchised businesses located in the United States, generating more than $800 billion in sales. These franchised businesses sell more than $758 billion in goods and services. Franchising represents 35% of all retail sales in the United States, employing over seven million individuals. One out of every twelve business establishments is a franchised business. There are over 1,200 franchise companies representing eighteen different industries.

Franchising has proven to be a wonderful and flexible growth vehicle for many businesses.

The reasons why so many companies franchise includes:

  • The flexibility it offers
  • The possibility for fast expansion with the reduced capital resources
  • The more significant incentive it provides to middle-managers
  • The alternative means of distribution available within it

In recognition of franchising’s distinctive features and its usefulness to the overall economy, franchise systems are typically afforded a degree of acquaintance by courts and regulators concerning particular labor, employment, tax, and agency liability matters. Further, a relatively well-reasoned and predictable body of franchise law has evolved to define and frame the industry.

What Is a Franchise?

A franchise is a form of licensing arrangement whereby one party licenses another to use its business system and trademark. Franchisees typically pay the franchisor an initial franchise fee and continuing royalty payments throughout the franchise term. In consideration of these payments, franchisors permit the franchisee to operate the franchised business under the franchisor’s principal trademark and typically provide a package of initial and ongoing assistance and training.

Such assistance and training typically include:

  • Site selection aid
  • Loan of the franchisor’s operations manuals
  • Training
  • Opening assistance
  • Advertising materials
  • Participation in buying and advertising materials
  • Accounting, business, and operating system assistance

A relationship is deemed a franchise if it satisfies the definitional elements under federal and state law.

The federal definition of this phrase is included in the FTC Rule, which describes a franchise as any arrangement whereby the franchisor:

  • Renders considerable aid to the franchisee in running its business or significantly controls the franchisee’s method of operation
  • Licenses the franchisee to disseminate goods or services under, or operate using, the franchisor’s trademark
  • Requires payment of a minimal fee to the franchisor.

Many states have also enacted laws concerning franchising. In doing so, various states have adopted their own definition of a franchise, which is materially different from the federal law definition of the term.

How Are Offers of Franchise Regulated?

The FTC Rule applies in all fifty states and US territories and requires that franchisors (and franchise brokers) deliver to prospective franchisees a pre-sale franchise disclosure document in the form of a franchise offering circular.

To satisfy the disclosure requirements under the FTC Rule, the franchisor’s disclosure document may be organized under either of two formats:

  • The disclosure document prescribed by the FTC Rule; or
  • The Uniform Franchise Offering Circular Guidelines (“UFOC Guidelines”) prescribed the franchise offering, adopted by the North American Securities Administrators’ Association and later approved by the Federal Trade Commission.

If a particular state also handles franchising, franchisors must comply in that state with both the FTC Franchise Rule and state law.

State disclosure requirements are necessary because several states deliver a private right of action to prospective franchisees for a franchisor’s infringement of the state statute. In determining the states in which a franchisor may need to file registration applications or with which state laws a franchisor may need to provide disclosure to a prospective franchisee, it is necessary to look to each state law.

According to the FTC Rule, a franchisor must deliver the disclosure document to a prospective franchisee at the earliest of:

  • The first personal meeting
  • Ten business days before the signing of any franchise or related contract
  • Ten business days before any payment

What Are the Business Elements of a Franchise?

There are two basic types of franchises used in the United States:

  • A “business format” or “package” franchise; and
  • A “product” franchise.

In a “business format” or “package” franchise, the franchisor licenses the franchisee to utilize the business system stipulated by the franchisor and associated with the franchisor’s trademark. In a business format franchise, the franchisor usually provides significant help or a marketing plan or system to its franchisees. It requires the franchisee’s rigid compliance with the controls and operation method under the franchisor’s business system. McDonald’s Corporation is an illustration of a business format franchise.

In a product franchise, the franchisee sells goods produced by the franchisor (or under the franchisor’s control or direction) and assumes the franchisor’s trademark. The product franchisor exerts substantial authority over the franchisee’s mode of operation or promises to deliver a substantial amount of aid in the franchisee’s method of operation. The franchisee is generally instructed to pay the franchisor for the privilege to distribute the goods.

Payment may take the form of required purchases of trademarked goods or an initial franchise fee. A beer distributorship or car dealer is an example of a product franchise.

What Are the Advantages and Disadvantages of Franchising?

A chief benefit of franchising is that it often allows prompt expansion of a thriving retail concept more quickly than company-owned expansion. Franchisors take advantage of each franchisee’s longing to be in business for themselves. Franchisees use their capital and personnel, not those of the franchisor, to expand the concept. If multiple-unit expansion is employed, many franchisees can be producing large territories simultaneously with somewhat little capital expenditure on the franchisor.

The disadvantage of franchising is that roughly twenty states have laws governing at least a portion of the ongoing franchise relationship. These laws may include conditions concerning a franchisee’s termination and renewal rights, including the franchisee’s right to cure a default under the franchise contract.

Should I Obtain the Services of an Attorney When Going Through a UFOC in Preparation for Becoming a Franchisee?

Setting up a franchise branch can be an incredibly complex process with many legal consequences. A business attorney who has experience dealing with franchise contracts and UFOCs can be valuable to help a potential franchisee negotiate fair terms that are in the best interest of the franchisee.