The franchise UFOC (Uniform Franchise Offer Circular) has been replaced by the new franchise disclosure document (FDD). Whether you are trying to write this key franchise document by yourself or you are using a Franchise Disclosure Document (FDD) Template to get it done, you need to be familiar with the key differences between the old and the new disclosure requirements. This information will be helpful when preparing your franchise disclosure, when searching for FDD templates, and when updating your existing disclosure document.
Changes in the Franchise UFOC Rule
The franchise UFOC was in use until July1, 2008. After changes in the Federal Trade Commission Rules (FTC rules), new requirements were introduced. Franchise UFOC disclosures are now referred to as Franchise Disclosure Documents (FDDs). There are many positive and negative changes for both franchisors and franchisees, and many changes that are positive for franchisors while bad for franchisees and vice versa.
The main changes concern financial statements, audits, broker disclosures, litigation, and performance presentation.
Financial statements – The franchise financial statement is an obligatory requirement for the new FDD, as it was for the old franchise UFOC document. The purpose of this statement is to provide potential franchisees with enough financial information about the franchisor so they can evaluate the overall condition of the business. The new FTC rule allows franchisors to prepare their financial statements according to the generally accepted accounting principles (GAAP). Companies that have been inactive during the three or more years prior to their franchise registration are allowed to submit unaudited franchise financial statements.
Brokers – Franchise UFOC requirements prior to their change in 2008 required any information about franchise brokers to be included in the franchise disclosure document. According to the new rule, this information can be omitted.
Litigation – The new FTC rules are significantly liberated in terms of litigation information that must be disclosed by franchisors in their disclosure documents. According to the old FTC rules, any franchise UFOC had to disclose full description of all litigations filed against franchisees and initiated by franchisors during the last 10 years. This time span is limited to 1 year only and comprehensive description is no longer required.
Performance presentation – While performance presentations couldn’t be part of old franchise UFOC documents, the amendments of the FTC rule allows disclosing such information. Whether or not performance presentations will be included in the FDD is really up to franchisors, as this is not an obligatory part of the disclosure document. If they decide to include such information, they must make sure it is prepared in accordance with the new FTC rule.
Other changes – Many other new requirements are also introduced with the changes in the FTC rule: new franchise UFOC documents that include lists of approved suppliers must disclose if any of their employees is involved in any of the approved suppliers’ companies; franchised units (open and closed) during the last three years must be presented in tabular format and included in the FDD and so on.