The Franchise Disclosure
Document
(formerly called the UFOC)
A
franchisor must give a detailed franchise disclosure
document to all prospective franchisees. This document is
called the Franchise Disclosure Document (formerly called
the Uniform Franchise Offering Circular, or UFDD / UFOC). I use
the terms “UFOC” "UFDD" and “franchise disclosure document”
interchangeably in this article.
The
franchise disclosure document is highly regulated. Federal
and state laws require very specific disclosures and
language for every single page of the document. The
required disclosures are long and complex, covering 23
separate items of disclosure. The disclosures cover the entire franchised business, including:
1. Requirements for initial investment, including
the franchise fee.
2. Physical property requirements, such as location,
building, equipment and supplies.
3. Operating practices.
4. Initial and on-going training and assistance given by the
franchisor.
5. Advertising and marketing obligations of the franchisor.
6. Royalties.
7. Bookkeeping, accounting and reporting
requirements.
8. The franchisee’s protected territory.
The
FTC’s instructions for the franchise disclosure document run
over 50 pages, and give you precise and exhaustive
instructions for each item of disclosure. I give you fair
warning: Drafting a UFOC will require a large amount of
your, the franchisor's, time.
The UFOC
is your friend.
Even
though the UFOC is long and complex, keep this in mind: The
document is your friend. The UFOC helps both the franchisor
and the franchisee. The franchise disclosure document
protects a franchisor by permitting it to disclose all
negative facts up-front to franchisees. Franchisees cannot
sue you for facts you disclosed up-front to them.
Disclosure is good, and the more the better. From the
franchisee’s perspective, the franchise disclosure document
is good because it contains in one place nearly all the
relevant disclosures that you need to evaluate a franchise.
Defective
UFOC = liability.
Remember
that disclosure is good. Conversely, an incomplete and
inaccurate UFOC can lead to litigation later on. Lawyers
representing your franchisees will view a bad franchise
disclosure document as a goody-bag of fun. They will bring
multiple claims against you, the franchisor, based on the
defects in the disclosure document. Their favorite claim is
that the defects in your franchise disclosure document
violated the FTC Franchise Rule and constituted an unfair
trade practice.
For
these reasons, smart franchisors invest their time and money
up-front in drafting a solid franchise disclosure document.
Smart franchisors make real disclosure of real facts about
their franchise system; they do not rely on form UFOCs
bought on the internet or copied from another franchisor.
Shameless
plug
You
should hire a franchise attorney to help you prepare your
UFOC / franchise disclosure document. The job must be done
right – the risks are too high to do it wrong.
If you want
to read more about franchising, try my main page "Franchise
Attorney." From there you can link to other
pages and articles of interest.
Call
me to schedule a legal consultation:
510-796-9144
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