The thought of wading through a document loaded with “legalese” has all the appeal of a root canal without anesthesia to most people. But reading the Uniform Franchise Offering Circular (UFOC) provided by the franchisor is the single most important thing a potential franchisee must do before signing on the dotted line.

A franchise attorney who writes UFOCs for a living estimates that only about 20% of people buying a franchise actually read this critical document before finalizing the deal. "And that’s an improvement over 10 years ago, when I would have guessed that only about 1% took the time to read it," he says.

One reason franchisees give for not reading the UFOC is that they are convinced the franchisor will not be willing to change the document no matter they find in it, and to a great extent, that’s true.

But it’s not a valid excuse for failing to read this critical document. If anything, it strengthens the argument for doing so. If the franchisor has no intention of making changes to the UFOC and it contains something that would make owning a franchise in that system unacceptable to you, you’d better find that out as soon as possible.

The cover page of the UFOC contains basic information about the franchisor, such as name, address and telephone number. It also states the initial franchise fee, estimated total start-up costs and the level of risk involved.

Sections 1 through 4 provide background information about the franchisor, identify other companies that have a relationship with the franchisor, and detail its history, operating style and management.

Peter Birkeland, author of "Franchising Dreams," advises taking a close look at the makeup of the executive team and making sure they have the requisite skills to lead the franchise system. In particular, look for relevant experience in the industry in which the franchise system operates. Other important items to look for in Sections 1-4 include information about litigation-past or pending-against the franchisor, especially if the lawsuits pertain to issues of franchise law or fraud.

The existence of such litigation does not necessarily mean the franchisor is no good. Anybody can sue anybody else over just about anything in this country, and about half of all franchise companies have been the subject of some litigation over the previous 10 years, according to research firm FRANdata.

However, a pattern of complaints should spark further investigation on your part. Birkeland suggests dividing the number of lawsuits by the number of franchisees to get a litigation rate. He suggests focusing your search on companies with a litigation rate of less than 1% and steering clear of those with rates greater than 3%.

Sections 5 and 6 contain more detailed information on the initial franchise fee, along with additional information about ongoing royalty payments and advertising fees. This information must be presented in a clear, tabular format to make it easy to compare against other franchises.

Sections 7 through 9 contain information about additional investment capital that might be required to launch the franchise. This can include fees for training, setting up and stocking the unit, and living expenses until the franchise becomes profitable.

Also spelled out in these sections are any requirements the franchisee might have to purchase goods and/or services from the franchisor, along with other franchisee obligations to the franchisor.

If financing is offered by the franchisor, the program must be explained in section 10. More common than direct financing is an offer of assistance by the franchisor to help you obtain financing from a third party.

What are you getting in return for your investment? That question is answered, at least in part, in section 11, which covers the franchisor’s obligations to you.

These typically include help in starting up the franchise and various forms of ongoing assistance. Training must be described in detail, and the company’s operations manual or at least the manual’s table of contents must be included with the UFOC.

The information in section 11, when coupled with that found in section 8, can provide a good sense of how the franchisor makes money. If the company has exclusive supply deals or rebate agreements with key vendors which produce revenue for the franchisor, those transactions will be listed here.

This can be a touchy area in discussions between franchisees and franchisors. Franchisees are likely to feel that any savings or revenue stream resulting from the franchisor’s relationships with vendors should be passed through to them.

However, for franchising to work optimally, it must be a win-win situation for both parties to the deal. That means the franchisor has to make money as well as the franchisees. If the franchisor is generating some revenue from sources other than increased franchise fees or royalties, that can be a good thing for both franchisor and franchisees. Each case must be examined on an individual basis.

Section 12 ventures onto dicey ground—the question of territory. Some franchisees who thought they had bought protected territories later find themselves competing with other franchisees or the franchisor itself through non-traditional outlets such as carts and kiosks or through supermarket sales of the franchisor’s products. Make sure all these areas are covered in this section.

Sections 13 covers trademarks, and section 14 covers the related areas of patents, copyrights and proprietary information. Any trademarks claimed by the franchisor should be registered to insure your right to continue using them in years to come.

Some franchises can thrive under absentee ownership, while others require the hands-on commitment of an owner-operator. The preferred method is usually determined by the type of franchise involved, but any obligation for the franchisee to participate in the actual operation of the business must be stated in section 15.

Restrictions on what the franchisee is allowed to sell are set forth in section 16, while section 17 provides important information about franchise renewal, termination, transfer and dispute resolution.

"Renewal, termination or sale of the unit may be the last thing on the potential franchisee’s mind at this point, but these items can become very important later on," notes J. Michael Dady, a Minneapolis franchise attorney. "Spend extra time reading section 17."

Section 18 lists any public figures associated with the franchise and has little relevance to most companies. Section 19, in contrast, relates to earnings claims, and this has been a major source of controversy in franchising for many years.

Franchisors are not required to offer earnings claims to potential franchisees, and most don’t. If they do, however, those claims must be based on actual sales, costs, income and profits of existing franchises, or on reasonable and verifiable projections in cases where the franchisor does not have an existing track record.

Steer clear of franchises where salespeople offer "informal" projections (often called "cocktail napkin" projections because of some salespeople’s proclivity to write a number on a slip of paper and offer it to a prospect over drinks). If it’s not in section 19, it’s not a valid claim.

Section 20 is also very important. It provides a list of outlets, including the names, phone numbers and addresses of current franchisees and those who have left the system over the previous three years. Contacting these people-both current and former franchisees-to find out what they really think of the franchise and the franchisor is a crucial part of your franchise search.

Section 21 is equally important, as it must contain the franchisor’s independently audited financial statements for the preceding two years. This will tell you how sound your parent company really is. The final two sections, 22 and 23, contain all the documents the franchisee is required to sign.