Franchise and Business Opportunities

What is the UFOC and
Why is it Important That You (and your Attorney) Read it?

Michael Dady, Attorney
Dady & Garner, P.A.

Potential franchisees may find themselves bombarded with information about the franchise they are interested in purchasing. Franchisors often use a multitude of sales tools, varying in size from single-page fliers to lengthy booklets and manuals, to entice potential franchisees to enter their franchise systems. These documents contain a wealth of information about the franchisor, which may seem repetitive and redundant. As a potential franchisee, you may think to yourself, “If I’ve seen one document, I’ve seen them all,” and assume that a quick read-through is sufficient to get the gist of the franchise. However, one of these documents should not be merely skimmed over. The Uniform Franchise Offering Circular, or UFOC, is one of the most significant documents you will receive from the franchisor, and it is imperative that both you and your attorney read it.

So, what is the UFOC? The UFOC is the document most often used by franchisors when making required disclosures to potential franchisees. Generally, all franchises are subject to disclosure requirements imposed by both federal and state law before any offer or sale of a franchise can be made. Franchisors make these disclosures, as required under the Federal Trade Commission’s FTC Rule or state disclosure laws.

The disclosures required in the UFOC provide basic information to potential franchisees about the franchisor, the franchised business, and the franchise agreement. The UFOC must be prepared in conformity with the UFOC Guidelines, which are administered by the North American Securities Administrators Association, Inc. (NASAA) and consist of the disclosure requirements, specific instructions, and sample answers for 23 separate Items that must be included in the UFOC.

While the UFOC document is not specifically required by the FTC Rule, the FTC will accept this document as a valid form of disclosure. However, some states that have franchise disclosure statutes will only accept disclosures in the UFOC format. Therefore, it makes economic sense for a franchisor to draft a single UFOC that is accepted under both the FTC Rule and state laws, especially where the franchisor wishes to sell franchises across a multi-state geographic area.

Before the franchisor may sell a franchise, the franchisor must deliver the UFOC to the prospective franchisee in accordance with the FTC Rule or state law. The FTC Rule requires delivery of the UFOC to the prospective franchisee at the earlier of the first personal face-to-face meeting held for the purpose of discussing the sale or possible sale of the franchise, or 10 business days before the execution of any binding documents (i.e. the franchise agreement) or the franchisee’s payment of any consideration. (A Proposed FTC Rule, which has not yet taken effect, would change the 10-business-day delivery requirement to 14 calendar days and omit the “first personal meeting” delivery requirement.) State laws have similar delivery requirements.

Disclosure and delivery requirements exist under federal and state laws for the benefit of franchisors and franchisees alike. It is important for franchisors to make disclosures and provide potential franchisees with information about the franchise for two reasons: 1) to entice potential franchisees to invest in the franchise; and 2) to ensure that each franchisee is qualified and capable of operating within its franchise system. Alternatively, the disclosures assist potential franchisees in analyzing the merits of the potential franchisor and in making a wise investment decision, should they choose to ultimately purchase the franchise.

If franchisors fail to comply with disclosure and delivery requirements, they may be liable to its franchisees. Information pertaining to each of the 23 Items in the UFOC must be fully and completely disclosed. However, while state and federal laws require these disclosures to be made, neither the FTC nor the individual states review the UFOC for its accuracy. As a result, franchisees should not simply take the UFOC at face value because there is no guarantee that any of the information contained in the UFOC is actually true.

Therefore, once the franchisor delivers the UFOC to you, it is of vital importance that both you and your attorney read it thoroughly for several reasons:

• As previously stated, the UFOC will be able to provide you with the basic information needed to help you make a fully informed decision about purchasing the franchise. The more you know about the franchisor, the less likely it is that misunderstandings and false assumptions will arise in the franchise relationship.

• The UFOC is one of the documents that are used to describe the legal relationship between you and the franchisor. It will be difficult for you to fully understand your rights and obligations as a franchisee, let alone the rights and obligations of the franchisor, without a thorough reading of the UFOC.

• A misleading disclosure in the UFOC, or a failure to disclose when there is a duty to do so, may give rise to common-law actions against the franchisor for fraudulent misrepresentation or concealment, or, in some states, statutory action based on state franchise acts. Additionally, franchisees may have claims against franchisors where ancillary documents, such as operations manuals, make representations or impose conditions that contradict or materially differ from the information disclosed in the UFOC.

• In some cases, the UFOC may be viewed as a part of the franchise agreement itself, and any misrepresentations made therein may give rise to breach of contract claims against the franchisor. These claims may allow you to recover your losses or obtain some other form of relief for the damages you suffer as a result of misrepresentation.

The UFOC is one of the most significant documents you will receive from the franchisor and as such must be read thoroughly and completely in order for you to fully understand the franchise relationship. A qualified franchise attorney can assist you in determining the overall desirability of the franchise offering by interpreting the UFOC and protecting your interests as a franchisee.

Michael Dady is the founding partner of Dady & Garner, P.A., a nine-member firm with offices in Minneapolis and New York, which limits its national practice to representing franchisees, dealers and distributors engaged in serious disputes with their franchisors or suppliers. Michael Dady is a former member of the Governing Committee of the ABA Forum on Franchising; he is listed in the Best Lawyers in America; and is a member of the Million Dollar Advocates Forum, having recovered several results in excess of one million dollars for clients who have been treated unfairly. To learn more about Dady & Garner, P.A. or to reach Michael, click here.

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