Franchise suppliers: assess compulsory purchasing requirements

A franchise can generate strong sales yet still leave little margin if supplies cost more than expected. Before choosing a brand, investigate what your outlet will have to buy, from whom and on what terms. Across a franchise network, standardisation helps maintain a consistent customer experience, but its requirements must be workable within each location’s commercial and logistical circumstances.

1. Understand what the law requires on suppliers

In Brazil, Law No. 13,966/2019, known as the Franchise Law, governs business franchising. It requires the Franchise Disclosure Document (Circular de Oferta de Franquia, or COF) to disclose any obligations to purchase goods, services or supplies needed to set up, operate or manage the outlet exclusively from suppliers designated and approved by the franchisor. The document must also include a complete list of these suppliers.

The law also requires information on minimum purchasing quotas for franchisees, and on whether and under what conditions they may refuse products or services required by the franchisor. These points are particularly important where the network has frequent product launches, perishable goods or seasonal collections.

Do not confuse a duty to disclose information with an automatic right to choose your suppliers. The legislation does not give franchisees blanket permission to replace approved suppliers with cheaper alternatives. Restrictions need to be examined in the COF, the contract and the other documents forming part of the agreement.

Ask your solicitor to identify any discrepancies between these materials. If the sales presentation promises freedom to source supplies but the contract requires exclusive purchasing, get the difference clarified in writing before committing.

2. Calculate the cost of products at your outlet

A price list alone will not tell you how much it will cost to stock your shop. Request the commercial terms applicable to your intended location, taking account of distance, delivery frequency and order volumes. An outlet close to a distribution centre may face different costs from one served by less frequent delivery routes.

Create a spreadsheet for the most important items in your operation and record:

• purchase price and quantity per pack;
• minimum order per item and per delivery;
• delivery, insurance and any handling charges;
• non-recoverable taxes, as assessed by an accountant;
• payment terms and volume-dependent discounts;
• shelf life, expected wastage and returns terms.

The aim is to estimate the effective cost per saleable unit, not simply per unit received. Goods that expire or arrive damaged without any entitlement to compensation can increase the effective cost of the remaining sales.

Compare this figure with a realistic selling price for the local area. Then deduct other variable expenses to assess how much each sale contributes towards fixed costs. Do not treat the difference between the selling price and the purchase price as net profit.

Also test the impact of losing a volume discount or needing an extra delivery. Be cautious if your margin always depends on securing the best possible commercial terms.

3. Test minimum orders and the risk of stock shortages

The central question is not just ‘Can I afford the order?’ but also ‘Can I sell this quantity under the expected conditions?’ Minimum purchases that do not match local demand can turn a price advantage into excess stock.

Request a supply forecast for the type of outlet you intend to open. Use conservative sales estimates and factor in the initial trading period, when you will still be establishing demand. Separate essential products from promotional or slow-selling items.

Clarify the following with the franchisor:

• Is the minimum calculated per month, per order or per category?
• Must the outlet accept new product launches or fixed product bundles?
• Can the outlet reduce purchases if demand falls?
• Who is responsible for delays, damage and incomplete deliveries?
• Is there a procedure for sourcing alternatives during a shortage?

Ask for objective criteria for using an alternative source: who authorises it, what documents are required and how the decision is recorded. A promise that ‘the network sorts it out when it happens’ is no substitute for a defined procedure.

Also assess how concentrated the supply arrangements are. If an essential item comes from a single supplier, establish what contingency plan will prevent the outlet from having to stop trading.

4. Ensure critical terms are reflected in the agreement

Before signing, put together a simple table covering purchasing obligations, suppliers, commercial terms, identified risks and outstanding questions. This allows you to compare brands on the viability of their supply arrangements, rather than just the appearance of their shops or the advertised investment.

Check how prices and terms can change during the contract. Look for rules on notification of price adjustments, changes of supplier, the addition of compulsory products and the treatment of orders already approved. Not every term will remain fixed, but you need to understand the risks you are taking on.

If viability depends on an exception, such as a reduced minimum order when opening, ask for it to be formalised in the appropriate legal document and reviewed by your solicitor. Do not base your decision solely on informal sales messages.

Practical conclusion: proceed when you can explain how much it costs to supply the outlet, how much you must buy and what happens if a delivery fails. If those answers still depend on assumptions, resolve the outstanding issues before entering into the agreement.