Franchise suppliers: what to assess before buying

Buying a franchise can mean taking on supply commitments that extend well beyond opening day. Mandatory suppliers, minimum orders and delivery terms affect both margins and business continuity. Within a franchise network, standardisation helps maintain the customer experience, but it needs to be backed by clear rules. Before choosing a brand, investigate how you will be able to buy, receive and reject products throughout the contract.

1. Understand which purchases are mandatory

Brazil’s Law No. 13,966/2019, the Franchise Law, requires the Franchise Disclosure Document (Circular de Oferta de Franquia, or COF) to provide clear, detailed information about any obligation to purchase goods, services or supplies only from suppliers designated and approved by the franchisor. Article 2, item XII, also requires a complete list of these suppliers.

Item XIX requires disclosure of any minimum purchase requirements imposed by the franchisor or third parties it designates, as well as whether, and under what conditions, the required products or services may be rejected.

These disclosure obligations do not automatically give you the freedom to buy from any business. Nor does a supplier’s designation guarantee competitive prices or reliable deliveries. You need to understand the scope of the restriction and its commercial implications.

Divide purchases into three groups:

• Exclusive: purchases must be made from a specific business.
• Approved: you can choose between approved suppliers.
• Unrestricted: you can source independently, provided you meet the brand’s specifications.

Ask the franchisor to confirm this classification in writing. If the COF refers only to a “list to be made available later”, request the complete list before deciding.

2. Calculate the cost of supplying your proposed location

A price list alone does not show how much it costs to keep an outlet supplied. The same product can have a very different overall cost depending on the destination, order frequency and logistics arrangements.

Request a quotation for your proposed address, based on an order that reflects your projected operations. Check the price, freight, transport insurance where applicable, applicable charges and any fees for split deliveries. Seek accounting support to avoid counting taxes twice.

Also check:

• minimum quantities per order and per product;
• whether different items can be combined to meet the minimum;
• payment terms and any requirement to pay in advance;
• delivery lead times and how frequently the supplier serves the area;
• minimum remaining shelf life on receipt;
• how price increases are determined and communicated.

Compare the cost per usable unit, not just the purchase price. A seemingly cheap batch can prove expensive if some of it expires before sale or if freight costs make smaller orders unviable.

As a test, model a month of lower demand. Ask whether minimum purchase requirements remain unchanged and whether there is a procedure for adjusting them. Distinguish between the franchisor’s requirements and commercial terms set directly by the supplier: different parties may be responsible for negotiating a solution to each issue.

3. Check what happens when deliveries go wrong

Supply arrangements also need to work when something goes wrong. Before signing, ask for the procedures covering delays, shortages, damage, quantity discrepancies and deliveries that do not meet specifications.

Look for specific answers: who handles the complaint, what evidence is required, how quickly you can expect a response, and how replacements, returns or credits are handled. Also confirm who pays the return freight and what happens to payment for a disputed delivery.

The legal obligation to disclose rejection conditions should not be confused with an unrestricted right to return any goods. The circumstances in which rejection is permitted need to be assessed across the full set of documents, with legal advice where necessary.

Also assess whether authorised alternatives are available. If the sole supplier stops delivering, can the outlet temporarily buy elsewhere? Who approves this exception, and what technical criteria must be met?

Ask for documented examples of the contingency procedure, without requesting confidential information about other outlets. An answer such as “the network always sorts it out” is no substitute for clearly defined responsibilities and steps.

4. Turn the answers into decision criteria

Create a table with five columns: mandatory item, authorised supplier, delivered cost, minimum purchase and alternative if supply fails. This helps identify over-reliance on individual suppliers and commitments that do not match expected demand.

Compare this table with the COF, the draft contract and the suppliers’ terms. Check how the supplier list can be changed, how changes are communicated and what happens to orders already confirmed. Do not assume that a commercial term offered during negotiations will remain valid throughout the contract.

Take any significant discrepancies to a lawyer experienced in franchising. Request clarification and have negotiated terms formally documented before making commitments.

Practical conclusion: proceed only when you know who you must buy from, what delivery will cost, which minimum purchase requirements you must meet and what support you will receive if supply fails. These answers help distinguish well-organised standardisation from a commercial dependency whose implications have not been made clear.