Franchising in Canada: check mandatory purchasing requirements

Joining a franchise network gives you access to shared products and methods. But having to buy from designated suppliers can also restrict your freedom and put pressure on your margins. Before buying a franchise in Canada, check exactly what you will have to order, on what terms and with what alternatives. Here is how to assess this commitment beyond the advertised price of the goods.

1. Establish which purchases are actually mandatory

Do not assume that sourcing requirements apply only to branded products. They may also cover packaging, equipment, uniforms, cleaning products or certain digital services.

Ask for a written list distinguishing three categories: purchases from the franchisor or a related company, purchases from approved suppliers, and purchases you can source freely provided they meet technical standards. For each category, identify the document that creates the obligation: the agreement, a schedule, the operations manual or the procurement policy.

The crucial issue is who has the power to change these rules. Can the franchisor add an exclusive supplier, require new equipment or withdraw a product you have already bought? Is there a notice period, a transition period or a rule covering stock you can no longer use?

Questions to ask include:

• Which purchases are mandatory at opening and during day-to-day operations?
• Are there minimum quantities or automatic orders?
• Can I propose an equivalent local supplier?
• Who is responsible for testing and approval costs?
• How quickly will a request to use an alternative receive a response?

A promise of flexibility is no substitute for a written procedure. Have important exceptions confirmed in the contractual documents following legal review.

2. Calculate the delivered cost rather than the catalogue price

A price negotiated for the whole franchise network does not necessarily offer the lowest cost for every outlet. Canada's long distances, delivery frequency and storage constraints can make a substantial difference.

With your accountant, put together a representative basket of the purchases your business will need. Use dated prices and volumes supported by evidence, without treating these figures as a guarantee of profitability.

For each item, record the price, shipping costs, surcharges, minimum orders and payment terms. Add foreseeable losses due to expiry dates or pack sizes. Also check the billing currency and who bears the risk of exchange-rate fluctuations for imported products.

Then compare this delivered cost with that of genuinely equivalent products. A cheaper item is not a valid comparison if it does not meet the same quality or safety standards.

Finally, ask whether the franchisor or a related company receives rebates, commissions or other benefits from suppliers, and whether any of these are shared with franchisees. Do not assume that purchasing savings will automatically be passed on to you. Ask for clarification of any arrangements described and how they are reflected in the contract.

3. Plan for shortages and supplier changes

A purchasing obligation becomes particularly restrictive when the designated supplier stops delivering. You may remain responsible to your customers while being prevented from sourcing elsewhere.

Ask how the emergency procedure works: who authorises an alternative, what evidence is required and how long does the authorisation remain valid? Also check who is responsible for damaged goods, delays, recalls and returns.

Work through three straightforward scenarios with the franchisor: an essential product becoming unavailable, a substantial price increase, and the compulsory replacement of equipment that still works. For each, establish what action you are allowed to take, the timescale and the cost.

The aim is not to secure complete freedom at the expense of brand consistency. It is to understand how you can continue serving customers while following the network's rules. If no solution is provided, have the risk assessed before committing.

4. Check purchasing obligations against the applicable law

Canada has no general federal law establishing a franchise disclosure regime. Specific rules are set at provincial level; have a lawyer confirm which apply to your proposed location at the time of purchase.

In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 requires, among other things and subject to applicable exceptions, that a disclosure document be provided at least 14 days before a franchise-related agreement is signed or any consideration is paid. Sourcing restrictions and benefits received from suppliers are among the matters to have checked against the disclosure requirements. The Act also imposes a duty of fair dealing in the performance of the agreement and the exercise of contractual rights; it does not, however, guarantee the lowest purchase price.

In Quebec, no franchise-specific legislation imposes the same regime. The Civil Code of Québec applies, including its rules on good faith and contractual obligations. Have an independent lawyer review the purchasing clauses rather than assuming that an unfavourable restriction is invalid.

Key takeaway: before signing, obtain the list of mandatory purchases, calculate their delivered cost and confirm the procedure for using alternatives in writing. A sourcing obligation needs to be understood as both a financial commitment and an operating rule.