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An Overview of the UFOC Franchise Disclosure Requirements

Written by: Peter Macrae Dillon

Article Overview: This article provides a point form summary of the information required to be disclosed by the Uniform Franchise Offering Circular requirements established by the North American Securities Administrators Association. peter macrae dillon Siskinds franchise franchisor franchising lawyer attorney Toronto Ontario Canada www.franchiselaw.ca

An Overview of the UFOC Franchise Disclosure Requirements

An Overview of the Required Disclosures

The UFOC must include the following information:

Item 1- In this term, the franchisor must describe its business, its business experience and the franchise offered. The franchisor must also provide information about its predecessors and affiliates and their business experience. In addition, disclosures must be made of regulations specific to the franchisor’s industry.

Item 2- The franchisor must include, in this Item, biographical information covering the last five years for the directors, executive officers, general partners and trustees of the franchisor and other employees who will have management responsibility in connection with its franchisees.

Item 3- In this Item, the franchisor must disclose certain litigation filed by or against it, its predecessors, any affiliate that offers franchises under the franchisor’s principal trademark and the persons identified in Item 2.

Item 4- The franchisor must disclose, in this Item, any bankruptcy filings in the last 10 years involving the franchisor, or its affiliates, its predecessors and any person identified in Item2.

Item 5- In this Item, the franchisor must disclose any payments that the franchisor or its affiliates prior to opening.

Item 6- In this Item, the franchisor must disclose the other fees that the franchisee is required to pay to the franchisor or its affiliates, including recurring fees.

Item 7- In this Item, the franchisor must estimate the initial investment that the franchisee must make to open the franchised unit.

Item 8- If the franchisee is required to purchase or lease any goods or services from sources designated or approved by the franchisor or under the franchisor’s specifications, the franchisor must identify those goods and services in this Item. The franchisor must state whether, and if so precisely how, the franchisor or its affiliates will derive income form the franchisee’s purchases.

Item 9- In this Item, the franchisor must list the franchisee’s principal obligations under the franchise agreement and other related agreements.

Item 10- In this Item, the franchisor must describe any financing offered directly or indirectly to the franchisee by the franchisor or its affiliates and any payments received by the franchisor or its affiliates as a result of the placement of financing.

Item 11- This lengthy Item requires the franchisor to describe the services it is contractually obligated to provide to the franchisee. In addition, the franchisor must describe the process for selecting a location for the franchisee’s business; the typical length of time between contract signing and unit opening; the franchisor’s advertising programs; computer system requirements; and the franchisor’s training programs.

Item 12- In this Item, the franchisor must describe any exclusive territory granted the franchisee and whether the franchisor has established, or may establish, another distribution outlet for products or services under the same trademark. The franchisor also must disclose whether its affiliates have established, or may establish, other franchises or other distribution outlets for similar products or services under a different trademark.

Item 13- The franchisor must provide information, in this Item, about the principal trademarks and service marks to be licensed to the franchisee and limitations on the franchisee’s use of the marks.

Item 14- This Item requires the franchisor to disclose information regarding any patents, copyrights, confidential information or trade secrets relevant to the franchise.

Item 15- This Item requires the franchisor to disclose whether the franchisee must personally participate in the operation of the franchised business.

Item 16- The franchisor must disclose, in this Item, any restrictions on the goods or services offered by the franchisee, restrictions on the customers to whom the franchisee may sell goods or services, and whether the franchisor has the right to change the type of authorized goods and services offered by the franchisee.

Item 17- This Item requires the franchisor to present information (in tabular form) about the term of the franchise relationship, modification, termination, renewal, and transfer of the franchise, and dispute resolution.

Item 18- This Item requires the franchisor to disclose the compensation given or promised to a public figure for use of that person’s name or image in the franchise name or symbol or in endorsing or recommending the franchise to prospective franchisees, and the extent of the public figure’s involvement in the management or control of the franchisor.

Item 19- If a franchisor wants to provide any information to a franchisee about potential sales, expenses or profits, the franchisor must include that information in this Item.

Item 20- In this Item, the franchisor must identify the name, address and phone number of at least 100 current franchisees; the number of franchises it anticipates selling in the next year; the number of franchises in the last 3 fiscal years that have been transferred, cancelled, terminated, not renewed or reacquired by the franchisor; and the name, home address and phone number of every franchisee who voluntarily or involuntarily ceased to be a franchisee during the last year, or who has not communicated with the franchisor within 10 weeks of the application date, and provide information about the number of company units.

Item 21- This Item requires the franchisor to include audited balance sheets as of the end of its last 2 fiscal years and statements of operations, of stockholders’ equity and of cash flow for its last 3 fiscal years. If the most recent balance sheet and statement of operations are for a period ending more than 90 days prior to the effective date of the UFOC, unaudited financial statements for the franchisor may include the financial statements of an affiliated company that has absolutely and unconditionally guaranteed the obligations of the franchisor under the franchise agreement.

Item 22- This Item requires the franchisor to include samples of all contracts that a franchisee might sign.

Finally the UFOC includes an acknowledgement of receipt to be signed by the prospective franchise.

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Re: Franchise Surveys - Another good tool to researching a franchise is to speak with their existing franchisees. This contact information is included in most Franchise Disclosure Documents. In order to get a Franchise Disclosure Document or FDD as it is often referred to, you will have to complete a basic franchise application. The franchisor will then usually provide you with the FDD at that time. Included in that book of information is a list of the existing franchisees, the contract, the investment information etc... This information is required by Federal Law to be disclosed to your prior to making a purchase. So be sure to do your research and start with the Franchise Documents to get the initial information.
UFOC Clearly States - Every UFOC clearly states that no government agency has checked the information in the UFOC. It is up to you to check it. You cannot simply rely upon what is in the UFOC without checking it out. (One might think that this is a make work program for franchisee lawyers and consultants, except that few franchisees every check out the UFOC.) There are a lot of ways to check the information out. For example, Netfran Development's UFOC has no earnings claim in item 19. But since the UFOC also discloses that NetFran is a public company, and so it is useful to review the company's 10k's - a public document- to see what is says about its franchisees. Remember that it is up to you to check out the UFOC and report any inadequacies to the relevant state/fed authorities.
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