Franchise offering documents follow one of two disclosure formats. The most commonly used is the Uniform Franchise Offering Circular ("UFOC") document format. The other is the Federal Trade Commission format. You can effectively review a franchise document by posing three groups of questions and looking for the answers in specific sections of the document.

Question One: Is the Program Fair to the Franchisee?
The first group of questions relates to the franchise program's fairness to franchisees. Items 8 and 9 of the UFOC call for discussions of mandatory purchasing requirements relating to equipment, inventory and other merchandise or services.

• Do the arrangements disclosed in these sections indicate monopolistic tendencies on the franchiser's part?
• To what extent can franchisees seek out other suppliers and negotiate for the best prices?
• If franchisees must buy specified products or services from the franchiser or approved suppliers, do the requirements make sense in relation to the program's structure? In a distributorship to market a brand name product, a requirement to buy inventory from a designated source may make sense. But in the same context, a requirement to buy office equipment or business forms from the franchiser may not.

UFOC items 5 and 6 call for disclosure of initial fees, royalties, and other ongoing charges. Item 10 requires a summary of the financing assistance the franchiser provides. Item 11 mandates a discussion of the franchiser's services package, and item 13 calls for a description of the franchiser's trademarks.

• Is the franchise price fair compared to the help the franchiser will provide and the established commercial value of its trademarks?  Items 12 and 16 require disclosure of territorial rights or other competitive protection franchisees enjoy and any restrictions on their business activities.
• Do the territorial protection and business restrictions mesh in ways that make sense?
• Is the franchisee limited to selling approved products at retail from a designated location, while the franchiser can appoint someone else in the franchisee's trade area to sell to the same class of customers at wholesale?  Item 17 mandates disclosure about the franchise's initial term and the conditions under which the franchisee can renew or sell the franchise. It also calls for disclosure of the circumstances under which the franchiser can terminate the franchise, refuse to renew it, and buy it back.
• Viewing these disclosures as a group, can the franchisee expect to stay in business long enough to earn a fair return on his investment?
• Can the franchiser appropriate part of the investment's value by taking over the franchise early or by buying it at a bargain price?
• Do the contract's default and termination provisions relate to serious problems that truly jeopardize the franchiser's interests, or do they expose franchisees to arbitrary or capricious behavior?

Question Two: What is the Franchiser's Stature
The second set of questions relates to the franchiser's stature. Is it credible and seasoned? Many of the UFOC sections previously discussed address these issues as well. You should analyze the two questions separately, and with a different objective in mind each time.

• Credibility is a "deal-breaking" issue. The franchiser must have the experience, financial stability, and integrity to do its end of the deal.
• The seasoning question is relative to the client's situation. Novice franchisers generally charge less for their franchises and to allow franchisees more operating flexibility. Their programs are typically more appropriate for "entrepreneurial" franchisees. Mature, well-seasoned franchises are usually better for franchisees who need firm direction and detailed operating guidance.  UFOC items 1 through 4 provide information about the franchiser's credibility and seasoning.
• Has the franchise system been operating long enough to establish a competitive niche?
• Has the franchiser demonstrated its commitment to the system by risking its own money or devoting sizable amounts to research and development?
• Has the franchiser operated its own outlets long enough to have faced and solved operating problems a franchisee is likely to encounter?
• Does the franchiser's management have the background and experience necessary to build and maintain a competitive chain?
• Does management's litigation and bankruptcy history indicate a propensity toward unsound or predatory deals?

The information in item 20 also provides clues about franchisee success and satisfaction. That item tells how many franchisees left the system for whatever reason during the prior three years and identifies those who left during the last twelve months.

Question Three: Is the Program Economically Viable?
The third group of questions addresses the program's economic viability. The financial statements a franchiser must include in its offering document will indicate whether the franchiser has adequate capital and has been profitable.