How to Buy a Business

One of the requirements before opening a franchise is completing a UFOC. The candidate must supply this (UFOC) Uniform Franchise Offering Circular, prior to accepting any money from a franchise candidate. This document is divided into 23 items, each covering a particular subject or group of subjects. Here is an overview of this document:

Items I - IV: THE FRANCHISOR, THE FRANCHISOR'S BACKGROUND AND THE FRANCHISE BEING OFFERED. List the name, principal business address, and telephone number of the Franchisor and its relationship, if any, to a parent corporation. It also provides a crystal-clear description of the Franchisor's business and the franchise being offered. All of the officers, directors and other management connected with the franchise and their backgrounds. In addition, these sections disclose relevant past or pending court proceedings, judgements, convictions, injunctive orders and arbitration proceedings against the Franchisor or any of its principals, as well as, the bankruptcy history of the Franchisor and its officers, directors, partners and predecessors.

Items V-VI: INITIAL AND ONGOING FEES. List the initial and ongoing fees associated with the franchise. It details what, if any, purchases must be made through the Franchisor of the Franchisor's approved sources. It also specifies late charges, penalties, delinquent payments and option fees.

Item VII: INITIAL INVESTMENT REQUIRED. lists all of the expenses necessary to start running the franchise. It details all of the construction, lease hold improvements, opening inventory, supplies, decor, fixtures, furniture, vehicles, computer hardware and software, signage and organizational expenses, permits and licenses, premiums for insurance coverage, training expenses and an estimate of working capital.

Items VIII and IX: FRANCHISEE'S OBLIGATION TO PURCHASE GOODS, SERVICES OR EQUIPMENT. If the franchisee must purchase or lease goods, services, supplies, equipment or real estate exclusively from the Franchisor, those terms and conditions must be clarified here. This is a very important area, as it dictates whom and what are approved suppliers and materials to be used exclusively by the Franchisee.

Item X: FINANCING ARRANGEMENTS. The details of Franchisor financing is covered in this item.

Item XI: FRANCHISORS OBLIGATIONS TO THE FRANCHISEE. This area covers what the Franchisor will do for the Franchisee both before and after the start up. It is critical to have a complete understanding of the Franchisor obligations, since this is the area the Franchisor designates as their "Pay back" to the Franchisee for the initial fee and continuing royalties. If this area is weak, it signifies that the Franchisee may not have much in the way of assistance from the Franchisor.

Item XII: TERRITORIAL RIGHTS. This item should clearly describe the geographic area (if any) in which the Franchisee is allowed to operate "Exclusively" - that is, to the exclusion of the Franchisor and other Franchisees. All sales volumes and marketing requirements, as well as, penalties imposed on the Franchisee for failure to meet these requirements is detailed.

Items XIII and XIV: TRADEMARKS AND COPYRIGHTS. The Franchisor must disclose all pertinent information concerning the subject. The extent to which the Franchisor protects a Franchisee's rights to use them is detailed.

Item XV: FRANCHISEE'S PARTICIPATION IN THE FRANCHISE OPERATION. Pay close attention to this clause if you plan to be an absentee owner. The Franchisor may not approve it.

Item XVI: ANY RESTRICTIONS ON GOODS AND SERVICES TO BE OFFERED BY THE FRANCHISEE. Any restrictions on goods and services is covered here. The Franchisor must detail any "National Accounts" the Franchisee may not be able to service. The sale "Mix," permitted to the Franchisee, is covered in detail. It is wise to understand the opportunities and problems associated with this item.

Item XVII: RENEWAL, TERMINATION, AND SALE OF THE FRANCHISE. Terminations and renewals are detailed. The Franchisor conditions for these subjects are set forth. Standards are imposed as to the Franchisor's ability to terminate or refuse to renew an agreement. Pay close attention to the Franchisor's "Right of first refusal," as it could materially affect the resale of the franchise if, and when the Franchisee decides to sell his/her business.

Item XVIII: ARRANGEMENTS WITH PUBLIC FIGURES. This item requires the Franchisor to detail what public figures are associated with the system and what compensation they receive.

Item XIX: EARNINGS CLAIMS. Most Franchisor's refrain from making earnings claims. It is legal for them to do so, but it requires a substantial amount of verification. Earnings claims are illegal unless detailed in the UFOC. Do not accept any oral representations of how much money you can make as a Franchisee.

Item XX: OTHER FRANCHISEES. The BEST way a potential Franchisee can learn about the Franchisor is to talk to other Franchisees. These people have already invested in the system and in most cases, will share their experience with you. This is an invaluable resource, take full advantage of calling and visiting as many Franchisees as possible.

Items XXI-XXIII: FINANCIAL STATEMENTS, CONTRACTS AND RECEIPT. Take full advantage of this data. If you are not extremely well versed in accounting skills, hire an Accountant to assist you with this data analysis. Under capitalized Franchisors will not be able to support you. Review all contracts and have an Attorney read the entire UFOC. Be careful to select an Attorney with FRANCHISE EXPERIENCE. The Attorney that helped you prepare a will may not have the appropriate experience to make the proper evaluation. You must sign the receipt, as proof the Franchisor made the UFOC available during your first face to face meeting. The Franchisor must keep the receipt on file if you become a Franchisee or not.

About the Author:

Richard is the Director of Dealer Development for RainSoft Water Treatment Systems. RainSoft has almost 50 years of industry leading experience, developing water treatment systems for residential and commercial markets. RainSoft products are marketed throughout the USA and Internationally through an independent Dealer network. Additional information associated with RainSoft is available at www.rainsoft.com.