This Ain't Your Average Hamburger Joint: Making a Mountain Out of a UFOC Designed to Fit a Molehill

The mammoth scope of the WaterSnoGo enterprise raises several interesting questions since it graphically illustrates the trend toward larger and more complex franchises that rely heavily on forming relationships among corporate suppliers with the franchisees. Among the questions that arise are: Can this really be a franchise? Is the UFOC the appropriate disclosure document? Does the FTC Rule facilitate or hinder this type of complex franchise development?

Is It a Franchise?

Two sets of laws potentially apply to any business relationship that borders on being a franchise: the Federal Trade Commission's franchising trade regulation rule (the “FTC Rule”) and various state statutes. Relationships meeting the FTC Rule's definition of a franchise must comply with the FTC Rule requirements whether or not they are deemed to be “franchises” under state law. It can quickly be established that the WaterSnoGo concept meets all three requirements of the FTC Rule.

The first requirement of the FTC Rule specifies that the franchisee must sell goods or services that are associated with the franchisor's trademark or must meet the franchisor's quality standards. WaterSnoGo is a registered trademark of M-O-H, and the program clearly meets the first stipulation of this standard. In addition, multiple relationships have been formed to maintain a high level of quality standards, requiring franchisees to utilize the services of Acer Snowmec Limited of Halesowen, England, and Schlitterbahn Water Park Resorts of New Braunfels, TX, as specialists in licensing and management; and McCarthy Building Companies of St. Louis, and Butler Heavy Structures of Kansas City as companies responsible for construction.

The second provision of the FTC Rule calls for the franchisor to exercise significant control over, or to give the franchisee significant assistance in, the franchisee's method of operation. Once again the WaterSnoGo concept complies with this provision, as M-O-H intends to exercise significant control over the franchisee's method of operation by requiring all facility personnel to be trained and managed by the Schlitterbahn Group, and all advertising/marketing funds and sponsorships to be managed and directed by M-O-H PRODUCTIONS INC.

The final condition of the FTC Rule necessitates that the franchisee, as a condition of obtaining the franchise, must pay at least $500 to the franchisor at any time before, to within 6 months after, the business opens or the affiliation with the franchisor begins. Yet again, the WaterSnoGo program conforms to this specification since once a client is identified and wishes to pursue a facility, it is required to enter into a site-specific cost analysis agreement with M-O-H, and to pay a fee for this service equal to 25% of the territory license fee (typically $250,000).

Is the UFOC Appropriate?

Now that it has been clearly demonstrated that the WaterSnoGo program meets the FTC Rule, the challenge in franchising this behemoth lies in compliance with FTC stipulations that were designed to protect mom-and-pop investors/franchisees. A typical UFOC required by the FTC runs, on average, about 50 pages. It is anticipated that the WaterSnoGo UFOC will exceed an unwieldy length of 500 plus pages, akin to stuffing 50 pounds of snow into a 5-pound sack.

When the FTC Rule was written and the current format of the UFOC was devised, a franchising enterprise the magnitude of the WaterSnoGo program was not envisioned. The 23 component items of the UFOC were designed to comprise a boilerplate disclosure document for franchises such as muffler shops, hamburger joints, or pizza or sub shops, not a multimillion-dollar entertainment complex. Yet under the current guidelines, all provisions of the UFOC must be adhered to, and full disclosure compliance achieved.

This raises an intriguing question: Is the standard UFOC format imposing an undue burden on efforts to franchise a concept that far exceeds the average size of franchises covered by current FTC regulations? Furthermore, is the FTC Rule deficient by not allowing any relief or exceptions in the reporting details required for an operation 680 times bigger than the guidelines ever anticipated?

For example, review ITEM 8 of the UFOC, addressing RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES. It requires the disclosure of franchisee obligations to purchase or lease from the franchisor, its designee, or from suppliers approved by the franchisor, or under the franchisor's specifications.

What would normally be a brief, nominal listing of vendors, burgeons into an incredible inventory, encompassing thousands of suppliers due to the sheer magnitude of the WaterSnoGo enterprise. Does the FTC regulation benefit either the franchisee or the franchisor in this instance, since implementation of the WaterSnoGo concept relies on specific established partnerships to ensure the quality and standardization of the design and construction of each franchise? Or does it simply add pages of inconsequential verbiage to the UFOC?

Or, consider the impact of ITEM 19 of the UFOC, EARNINGS CLAIMS, in the WaterSnoGo case. This item requires that a specific level or range of actual or potential sales, costs, income, or profit be identified. Again, what is usually on average a three-page document, mushrooms into an unwieldy treatise because of the number of streams of revenue and sources of expenses that need to be identified in an enterprise that is the size and complexity of the WaterSnoGo program.

ITEM 19 would normally take a junior accountant about half a day to prepare. For WaterSnoGo, a staff of nine needed nearly 2 weeks to compile the necessary estimates. The constants that are traditionally used to generate earnings claims not applicable in this case because no model exists for the compilation of all businesses into one earnings statement.

As clearly stated in the UFOC guidelines, the intent of the circular is to “Disclose clearly, concisely, and in a narrative form that is understandable by a person unfamiliar with the franchise business.” Is this end achievable when the scope of a franchise offering transforms a document that was meant to provide comprehensible disclosure into an impenetrable treatise of minutiae?

The FTC Rule v. the UFOC

The FTC Rule, in and of itself, does not appear to be the source of hindrance in franchising a concept of the magnitude and complexity of the WaterSnoGo program. Instead, the UFOC, a bureaucratic document that discloses random bits of information in a random format, emerges as the source of the problem. The UFOC, which is illustrated by the use of the Belmont Muffler Shop as a sample filing, is designed to accommodate a minimal one- or two-man operation, thereby establishing a simplistic level of discourse, discussion, and discovery.

Regardless of the size of the enterprise being franchised, the current UFOC provides only about 10% of the information that is important in discerning whether or not a franchise offering is viable. The filing of a traditional business plan (in the WaterSnoGo example or for any size franchise, for that matter) would provide more flexibility for franchisors as well as afford a vastly greater degree of disclosure for potential franchisees.

Franchise offerings on the magnitude of WaterSnoGo may well prove to be the exception rather than the rule, but this doesn't diminish the need to examine the establishment of an exemption or modification of detail required for the UFOC when franchising complex operations.

Barring the establishment of a revised UFOC adopting a business plan format that could accommodate a variety of franchise offerings, perhaps the North American Securities Administrators Association could at least revisit the guidelines and start a dialogue with the FTC to create a workable document for super-sized franchise offerings, rather than the one-size-fits-all document that is currently required.

What happens when your client wants to build a mountain? Literally. And franchise the concept. That's exactly the challenge presented by the WaterSnoGo proposed franchise under development by M-O-H INCORPORATED.

The WaterSnoGo franchise is a massive family entertainment complex that includes a 200-foot, man-made ski mountain, a 600,000-plus square foot water and adventure park, more than 50,000 square feet of retail space, and an optional hotel and conference area. Each franchise site will require a minimum of 52 acres to accommodate the 1/4-mile-long WaterSnoGo complex that is also 27 stories high, and carries a price tag of $170 million.

When all of the paperwork is complete, the trademarked WaterSnoGo concept will be marketed and sold throughout the United States as franchises with a territory license. It will comprise one of the largest and most costly franchise offerings in the history of franchising worldwide. Negotiations are now in progress for four sites in the United States, and it is hoped that as many as 10 facilities will be developed in the next 3 to 5 years.

The mammoth scope of the WaterSnoGo enterprise raises several interesting questions since it graphically illustrates the trend toward larger and more complex franchises that rely heavily on forming relationships among corporate suppliers with the franchisees. Among the questions that arise are: Can this really be a franchise? Is the UFOC the appropriate disclosure document? Does the FTC Rule facilitate or hinder this type of complex franchise development?

Is It a Franchise?

Two sets of laws potentially apply to any business relationship that borders on being a franchise: the Federal Trade Commission's franchising trade regulation rule (the “FTC Rule”) and various state statutes. Relationships meeting the FTC Rule's definition of a franchise must comply with the FTC Rule requirements whether or not they are deemed to be “franchises” under state law. It can quickly be established that the WaterSnoGo concept meets all three requirements of the FTC Rule.

The first requirement of the FTC Rule specifies that the franchisee must sell goods or services that are associated with the franchisor's trademark or must meet the franchisor's quality standards. WaterSnoGo is a registered trademark of M-O-H, and the program clearly meets the first stipulation of this standard. In addition, multiple relationships have been formed to maintain a high level of quality standards, requiring franchisees to utilize the services of Acer Snowmec Limited of Halesowen, England, and Schlitterbahn Water Park Resorts of New Braunfels, TX, as specialists in licensing and management; and McCarthy Building Companies of St. Louis, and Butler Heavy Structures of Kansas City as companies responsible for construction.

The second provision of the FTC Rule calls for the franchisor to exercise significant control over, or to give the franchisee significant assistance in, the franchisee's method of operation. Once again the WaterSnoGo concept complies with this provision, as M-O-H intends to exercise significant control over the franchisee's method of operation by requiring all facility personnel to be trained and managed by the Schlitterbahn Group, and all advertising/marketing funds and sponsorships to be managed and directed by M-O-H PRODUCTIONS INC.

The final condition of the FTC Rule necessitates that the franchisee, as a condition of obtaining the franchise, must pay at least $500 to the franchisor at any time before, to within 6 months after, the business opens or the affiliation with the franchisor begins. Yet again, the WaterSnoGo program conforms to this specification since once a client is identified and wishes to pursue a facility, it is required to enter into a site-specific cost analysis agreement with M-O-H, and to pay a fee for this service equal to 25% of the territory license fee (typically $250,000).

Is the UFOC Appropriate?

Now that it has been clearly demonstrated that the WaterSnoGo program meets the FTC Rule, the challenge in franchising this behemoth lies in compliance with FTC stipulations that were designed to protect mom-and-pop investors/franchisees. A typical UFOC required by the FTC runs, on average, about 50 pages. It is anticipated that the WaterSnoGo UFOC will exceed an unwieldy length of 500 plus pages, akin to stuffing 50 pounds of snow into a 5-pound sack.

When the FTC Rule was written and the current format of the UFOC was devised, a franchising enterprise the magnitude of the WaterSnoGo program was not envisioned. The 23 component items of the UFOC were designed to comprise a boilerplate disclosure document for franchises such as muffler shops, hamburger joints, or pizza or sub shops, not a multimillion-dollar entertainment complex. Yet under the current guidelines, all provisions of the UFOC must be adhered to, and full disclosure compliance achieved.

This raises an intriguing question: Is the standard UFOC format imposing an undue burden on efforts to franchise a concept that far exceeds the average size of franchises covered by current FTC regulations? Furthermore, is the FTC Rule deficient by not allowing any relief or exceptions in the reporting details required for an operation 680 times bigger than the guidelines ever anticipated?

For example, review ITEM 8 of the UFOC, addressing RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES. It requires the disclosure of franchisee obligations to purchase or lease from the franchisor, its designee, or from suppliers approved by the franchisor, or under the franchisor's specifications.

What would normally be a brief, nominal listing of vendors, burgeons into an incredible inventory, encompassing thousands of suppliers due to the sheer magnitude of the WaterSnoGo enterprise. Does the FTC regulation benefit either the franchisee or the franchisor in this instance, since implementation of the WaterSnoGo concept relies on specific established partnerships to ensure the quality and standardization of the design and construction of each franchise? Or does it simply add pages of inconsequential verbiage to the UFOC?

Or, consider the impact of ITEM 19 of the UFOC, EARNINGS CLAIMS, in the WaterSnoGo case. This item requires that a specific level or range of actual or potential sales, costs, income, or profit be identified. Again, what is usually on average a three-page document, mushrooms into an unwieldy treatise because of the number of streams of revenue and sources of expenses that need to be identified in an enterprise that is the size and complexity of the WaterSnoGo program.

ITEM 19 would normally take a junior accountant about half a day to prepare. For WaterSnoGo, a staff of nine needed nearly 2 weeks to compile the necessary estimates. The constants that are traditionally used to generate earnings claims not applicable in this case because no model exists for the compilation of all businesses into one earnings statement.

As clearly stated in the UFOC guidelines, the intent of the circular is to “Disclose clearly, concisely, and in a narrative form that is understandable by a person unfamiliar with the franchise business.” Is this end achievable when the scope of a franchise offering transforms a document that was meant to provide comprehensible disclosure into an impenetrable treatise of minutiae?

The FTC Rule v. the UFOC

The FTC Rule, in and of itself, does not appear to be the source of hindrance in franchising a concept of the magnitude and complexity of the WaterSnoGo program. Instead, the UFOC, a bureaucratic document that discloses random bits of information in a random format, emerges as the source of the problem. The UFOC, which is illustrated by the use of the Belmont Muffler Shop as a sample filing, is designed to accommodate a minimal one- or two-man operation, thereby establishing a simplistic level of discourse, discussion, and discovery.

Regardless of the size of the enterprise being franchised, the current UFOC provides only about 10% of the information that is important in discerning whether or not a franchise offering is viable. The filing of a traditional business plan (in the WaterSnoGo example or for any size franchise, for that matter) would provide more flexibility for franchisors as well as afford a vastly greater degree of disclosure for potential franchisees.

Franchise offerings on the magnitude of WaterSnoGo may well prove to be the exception rather than the rule, but this doesn't diminish the need to examine the establishment of an exemption or modification of detail required for the UFOC when franchising complex operations.

Barring the establishment of a revised UFOC adopting a business plan format that could accommodate a variety of franchise offerings, perhaps the North American Securities Administrators Association could at least revisit the guidelines and start a dialogue with the FTC to create a workable document for super-sized franchise offerings, rather than the one-size-fits-all document that is currently required.