Before any financial transactions can be made between the franchisee and franchisor, The Federal Trade Commission requires that all franchisors submit a Uniform Franchise Offering Circular, (UFOC), to all potential franchisees. Franchisors must provide this document to the franchisor at least 14 days before any contracts are signed or monies are paid, but the franchisee may request a copy of this disclosure once an application has been received and accepted for consideration. This disclosure statement covers information like fees, initial and recurring costs, termination and renewal conditions, and franchisee requirements. The UFOC also provides the franchisee with valuable information about various aspects of the franchise company, which will assist in making the choice to invest.

The track record of a company is a helpful predictor of future trends. A section of the disclosure statement will address the franchisor’s business history. It will not only divulge information about the company, but also identifies the executives of the franchise and their business background, experience, and length of employment. In addition to this information are facts like company age, litigation history of the franchisor and its executive officers, the bankruptcy record of both the company and its executives, competitors, and license or permit requirements.

A portion of the disclosure document covers the franchisor’s restrictions. Restrictions may include territory boundaries, the sale of goods or services, supplier lists, and marketing options. This section will give the franchisee a clear picture of the control and business judgment they will be able to exercise in their franchise.

The franchisor’s training programs are reviewed in the UFOC. It will examine the length, costs, and location of training sessions. Issues like who is eligible for training, the qualifications of the trainers, and training topics should also be covered. Variable factors like the type of franchise and the potential franchisee’s prior experience will dictate many things like the availability of ongoing and individual training support.

A percentage of the franchisee’s income is typically routed to an advertising fund that benefits the franchise as a whole. The disclosure document will outline how the monies from the fund are allocated on local or national ads, administrative costs, or other miscellaneous expenditures. The literature will also discuss the franchisee’s ability to take part in their own advertising efforts, and whether there are rebates or discounts for doing so. Another important point is whether the advertising costs are standard or variable for each franchisee.

One of the sections lists both current and former franchisees. Large amounts of cancelled, terminated, or non-renewed franchisees may show trends of problems. It is an important research step to contact current and recent former franchisees. They can provide accurate experience about their business volume and experience with the franchisor. If they signed confidentiality agreements and cannot divulge any information, it is important to try others on the list until there is someone who can. They can tell you about any hidden costs they incurred, whether the franchisor fulfilled their obligations as promised, and their overall satisfaction with their franchise experience. If the franchisor provides a separate list of franchisees to contact, it is still important to contact some listed in the disclosure document to get an accurate picture.

Although franchisors are not obligated to relate information in the UFOC about a franchisee’s potential earnings or sales volume, some disclosures do contain this information. If the statement contains this data, it is required by law that the franchisor have a rational foundation for their projections, and that they make the support of these claims readily available to potential franchisees. This is important to review thoroughly as earnings information can be misleading. A disclosure statement should give more detailed information about factors that could affect the validity of the data, such as sample size or geographic location of the franchises used in the sample- skew the accuracy of figures like average income, gross sales, or net profits.

Audited financial statements are also provided in the UFOC, and should be reviewed by a legal or financial professional. When analyzed properly, this information can give a good understanding of the company’s growth patterns, financial stability, and allocation of funds to supporting its franchise system.

After receiving information regarding the franchisor’s earnings or finances, the franchisor may be asked to sign a statement acknowledging receipt of the data. If is vital to fully report any information, or it may waive the right to dispute the earnings representation that were made, and influenced the decision making process.

The comprehensive facts and figures contained within the UFOC provide priceless content. The examination of the trends and history of a franchise company can greatly aid the potential investor in making a responsible decision. While any business venture or investment choice carries a certain amount of risk, thorough research and increased knowledge can reduce the financial speculation for a prospective franchisee.