The first step to investigating any franchise is to locate the system’s Uniform Franchise Offering Circular (UFOC). The UFOC is also called a Franchise Disclosure Document (FDD). This is the formal documentation that gives extensive information about the franchisor and the franchise organization. The point is to give you, the potential franchisee, enough information to make educated decisions about your potential investments. You need to know what’s in this document and what to look for as you read.
The FDD is divided into a cover page, table of contents and 23 categories called Items. It may look like an intimidating document but it’s brimming with critical information so try to remain calm if the hefty stack of papers seems daunting.
- Items 1 – 4: The franchisor’s background, the experience of key executives and the company’s litigation and bankruptcy history
- Items 5 – 6: All the fees charged by the franchisor
- Item 7: An estimate of the total investment needed to establish the business
- Item 8: Restrictions on the purchase of products to be used and sold in the unit
- Item 9: The franchisee’s obligations
- Item 10: Financing that the franchisor makes available
- Item 11: A summary of the services, such as training and site selection, that the franchisor provides in relation to the franchise program
- Item 12: Territorial protections
- Items 13 and 14: The status of the trademarks, copyrights and patents associated with the program
- Item 15: Obligations of the franchisee to participate in the actual operation of the franchised business
- Item 16: Restrictions on what the franchisee can sell
- Item 17: Renewal, termination, transfer and dispute resolution provisions
- Item 18: Public figures used to promote the franchise
- Item 19: A description of how well the franchises perform financially
- Item 20: System statistics and lists of franchisees and former franchisees
What to Read for
As you navigate the FDD, pay attention to
- Term (duration of) agreement and renewal provisions and conditions
- Termination clauses
- Franchise territory
- Procedures and restrictions
- Training and assistance
- Earnings potential – gross sales, net profit
- Expansion plans: How fast do they plan to grow? Where do they plan to grow? Do they have a business plan for your area of location?
- What is their analysis of the competition in your area?
- How many units are being planned for your area? Why that many?
- How much is going to be spent in regional advertising in your area?
Next time, we’ll discuss how to interview a franchisor. If you are thinking about a franchise opportunity, talk to your local FranNet consultant and receive your free Personal Franchise Assessment to get matched to the right franchise for your business personality.