Disclosure Documents Tips

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Do all the states have the same UFOC filing requirements?

Know State Requirements

Once registered in your home state, you should check out the requirements for other states because there may be some in which you will not choose to do business.

Some states have additional requirements for selling your franchise. There are registration states and non-registration states. A further subdivision is whether or not the states require inclusion of audited financial statements.

Legally, the Federal Trade Commission (FTC) DOES NOT require registration or the filing of the disclosure document in any of the non-registration states. You may want to concentrate your sales efforts on these states as your initial filing in your home state is sufficient.

Registration states require that the offering must first be approved and registered by the state before it can be promoted to prospective franchise buyers. This is in addition to your home state registration. These states include: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin.

Certain states, such as Illinois and Minnesota, have even more stringent requirements for the franchisor. This supposedly affords better protection for the prospective franchisee, but is expensive for the franchisor.

Your lawyer will have a current and complete listing of filing requirements by state.

   
Where do I register my UFOC?

File The Initial UFOC

You must register your Uniform Franchise Offering Circular (UFOC) in the state your business is located. There are requirements for registering disclosures in the Uniform Franchise Offering Circular. Most likely your attorney will file for you, but you should be aware of the documents required in the original registration application.

  • Uniform Franchise Registration Application Page (also known as "Facing Page")
  • Supplemental Information page(s)
  • Certification page
  • Uniform Consent to Service of Process
  • Sales Agent Disclosure Form
  • If the applicant is a corporation or partnership, an authorizing resolution if the application is verified by a person other than applicant's officer or general partner
  • Uniform Franchise Offering Circular
  • Application Fee
  • Auditor's consent to the use of the latest audited financial statements in the offering circular
  • Advertising or promotional materials

   
Do I need a franchise attorney?

Engage A Franchise Attorney

It is very important that you consult with a franchise attorney that has extensive franchise experience. You will work closely and frequently with your attorney. You will be bound by the documents your attorney creates. You will need your attorney's experience and guidance in expanding your franchise base. Even more than with your Trademark Attorney, you will need to have a strong business relationship based on mutual trust and respect.

Do not choose attorneys based solely on lawyer referral services. These services typically do not evaluate the abilities of the attorneys in their listings. They accept any attorney willing to pay their membership dues.

Do not choose attorneys based solely on their advertisements. All a fancy advertisement tells you is that the lawyer has funds for advertising.

DO interview attorneys and determine who you'll be working with – the attorney or paralegals.

DO ask if the franchise attorney has experience with start-up franchises and franchises in your industry.

DO consider physical proximity. While your attorney will be able to work effectively via telephone, e-mail and fax, it may be beneficial to meet face-to-face in the early stages of the process.

DO trust your instincts. Personality is important, as you will be working closely with your attorney throughout your franchise endeavor.

DO understand the attorney's billing policies. Is it per hour? What is the rate per hour? Make sure it's affordable for the level of service you require.

   
Do I have to be involved in writing the UFOC?

Be Involved In Writing The UFOC

Since the Uniform Franchise Offering Circular (UFOC) is the legal document that controls the franchise relationship, it is imperative that it be comprehensive and correct.

An attorney will write the UFOC, but you should be extremely involved in the process. Do not accept a generic UFOC document. The general format may be “off-the-shelf,” but it will be customized to your situation and specifics.

You will be bound by this document. It is imperative that you examine and review all of your franchise documents personally.

   
Are there standards for writing the Uniform Franchise Offering Circular (UFOC)?

Comply With Style Standards

Your franchise information is presented to the prospective franchisee in the form of a standardized document called the Uniform Franchise Offering Circular (UFOC). Both content and style are standardized. Style standards include:

  • State all material facts in an accurate and unambiguous manner.
  • Write clearly, concisely and in a narrative form that is understandable by people unfamiliar with the franchise business.
  • Avoid legal verbiage and repetitive phrases.
  • When possible use active, not passive voice.
  • Limit the length and complexity of disclosure through careful organization of information.
  • Avoid technical language and unnecessary detail.
Make the format and chronological order consistent within each item.

   
What are the standard items in the Uniform Franchise Offering Circular (UFOC)?

Disclose Required Information

The Uniform Franchise Offering Circular (UFOC) contains 23 items of information that must be current as of the completion of the franchisor's most recent fiscal year. If there is a material change to the information in the document, the franchisor must make a revision. The document must be given to a prospective franchisee at the first personal meeting of franchisor and prospective franchisee or ten working days prior to the execution of a contract or money payment to the franchisor, whichever occurs first. The standard UFOC items are:

  1. The Franchisor, Its Predecessors And Affiliates
  2. Business Experience
  3. Litigation
  4. Bankruptcy
  5. Initial Franchise Fee
  6. Other Fees
  7. Initial Investment
  8. Restrictions On Sources Of Products And Services
  9. Franchisee's Obligations
  10. Financing
  11. Franchisor's Obligations
  12. Territory
  13. Trademarks
  14. Patents, Copyrights and Proprietary Information
  15. Obligation To Participate In The Actual Operation Of The Franchise Business
  16. Restrictions On What The Franchisee May Sell
  17. Renewal, Termination, Transfer And Dispute Resolution
  18. Public Figures
  19. Earnings Claims
  20. List Of Outlets
  21. Financial Statements
  22. Contracts
  23. Receipt

   
What are disclosure documents?

Comply With Disclosure Requirements

Disclosure documents were created in response to some unethical behavior in the 1960s and 1970s when franchises were not regulated. Today, the Federal Trade Commission (FTC) has an active interest in franchising and their Franchise Rule states what must be disclosed, and in what format. You cannot sell a franchise if you do not comply with the Franchise Rule.

The most common format for Franchise Rule compliance is the Uniform Franchise Offering Circular (UFOC), issued by the North American Securities Administrators Association. Guidelines for preparing UFOC disclosures are available from:

North American Securities Administrators Association
750 First Street, Suite 710
Washington, DC 20002
(202) 737-0900

www.nasaa.org

Franchisors who use the UFOC must follow these guidelines to comply with the Franchise Rule.

   
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