Deciphering the UFOC

"It's a great cure for insomnia," says Howard Bassuk, president of Frannet (http://www.frannet.com), a franchise consultancy in San Diego, Calif. "It's dry, but it's very, very important. It's the hub around which you base a lot of your research."

Just what is this thing called a UFOC? The definition depends on whom you ask. Some people view it as the government's attempt to regulate free enterprise. Others see it as a way to protect investors from investing their life savings in an unproven system at best or a scam at worst

Basically, the UFOC is the presale prospectus that franchisors must provide to franchisees at least 10 days before any contracts are signed or money changes hands. It contains 23 items, everything from the business backgrounds of corporate officers to litigation history and start-up costs.

The UFOC has its origins in the 1971 California Franchise Registration and Disclosure Act, the first franchise law enacted in the United States. Thirteen additional states (Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin) later adopted the same requirements.

In 1975, the Midwest Securities Commissioners Association, a group of state securities commissioners, developed a uniform format for franchise disclosures, today known as the UFOC. The North American Securities Administrators Association, NASAA, now administers the rule.

The Federal government got into franchise regulation in 1979, when the Federal Trade Commission released its own franchise disclosure rule, "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures." The FTC rule allows franchisors to use the UFOC guidelines, which are accepted in all 50 states. Hence, virtually all national franchisors follow UFOC, not FTC, guidelines in preparing their disclosure documents.

So, the industry had a standard. But what it didn't have was an intelligible one. The UFOC was notorious for its technical language. So, in 1993, NASAA adopted a "user friendly" format. The UFOC must now be written in plain English, avoiding legal and technical language, and repetitive phrases. The guidelines even specify that certain words and phrases be avoided: aforesaid, arising from, condition precedent, in consideration of, foregoing, forthwith, etc.

Despite this simplification, it's still difficult to navigate the UFOC. Franchise Profiles International (www.franchise411.com), an Orange Park, IL, consultancy, advises prospective franchisees to read the document three times. Read it straight through the first time. On your second run, write down any comments, questions, reservations or concerns you may have. Use your final read to find answers to your questions and concerns.

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