No business deal should ever be struck without thorough consideration. Choosing to invest in a franchise is not different. You have to understand all of the details of your potential franchise agreement in order to determine if you're getting a good deal or if you should keep looking.
Government Disclosure RegulationsIn the 1960's and 1970's, franchisees faced some serious problems. Because there were really now laws in place to protect them, potential franchisees could be told almost anything about their potential for profit and success by the franchisor. Then once they signed on the dotted line and handed over the check, things could quickly turn bad.
To stop this problem, the Federal Trade Commission (FTC) stepped in and established regulations regarding what and when franchisors had to disclose certain information about their businesses. This information includes earnings claims and forecasts, plus details about the background of the company - bankruptcies, trademarks, etc.
All of this information must be provided up to 10 days before a franchisee pays any money to the franchisor. This provides you with adequate time to review the information and make a sound decision based on concrete facts.
Incidentally, all franchisors are required to follow these regulations. Some unscrupulous franchisors may try to say that they are exempt from the rules for any number of reasons which sound good, but they are either lying or they do not know the law. Either way, you should steer clear of these folks.
Uniform Franchise Offering Circular (UFOC)
That brings me to the Uniform Franchise Offering Circular (UFOC). The UFOC is the document presented to potential franchisees which is supposed to contain all of the information required by the FTC. The UFOC must contain 23 different types of information, including bankruptcy and litigation history of the company, the business experience of the person(s) in charge of the franchisor, details of the franchise fees and required initial investment, obligations of both the franchisee and the franchisor, financial statements for the company, forecasted franchise earnings, details about the other franchise operations, and more. The actual franchise agreement and other documents which would require your signature will also be included as exhibits.
All of this information must be accurate and up-to-date. In fact, some states go one step further and require that the UFOC be approved by the state government before it can be presented to potential franchisees. Illinois and Minnesota have very strict laws in place to further protect franchisees.
The purpose of the UFOC is to allow you to compare one company to another using reliable and accurate data instead of unsubstantiated claims. For this reason, you should closely read the entire UFOC more than once. Although the reading probably won't be as fascinating as a novel, it will help you become an informed decision maker.
While it may be tempted to briefly scan the UFOC's sections on fees and obligations then toss it aside, you have to resist this urge. The FTC's disclosure regulations which lead to the creation of that UFOC were intended to protect and inform consumers so they did not end up making a huge financial mistake. Take the time to become informed before you sign any agreement or pay any money. After all, this is a big decision and a sizable investment - and you don't want to end up regretting your decision.