Franchising in Canada: checking mandatory suppliers

Buying a franchise often means agreeing to order from designated suppliers. These purchases can help maintain quality and consistency across the franchise network, but they also affect your margins and independence. Before committing, check what you will have to buy, on what terms and what alternatives are available if problems arise.

1. Establish which purchases are actually mandatory

Do not settle for a general claim that collective purchasing secures better terms. Ask for a written list of the goods and services covered by mandatory purchasing requirements: ingredients, stock, packaging, equipment, uniforms, cleaning products or IT services, depending on the business model.

Distinguish between three arrangements:

• An exclusive supplier: you must buy from a specific business, sometimes the franchisor itself or a related company.
• A list of approved suppliers: you have a choice, but only among approved businesses.
• Mandatory specifications: you may propose a supplier that meets the required specifications, subject to the terms of the contract.

For each category, establish who can change the list, how changes are communicated and who bears the cost of stock or equipment that can no longer be used. Also check whether minimum order quantities are set by the franchise agreement or by a separate agreement with the supplier.

The aim is not to reject centralised purchasing altogether. It is to understand exactly what commitments you are accepting and which decisions you will still be able to make locally.

2. Compare the delivered cost, not just the quoted price

An attractive unit price does not guarantee cost-effective purchasing. Ask for an up-to-date price list for your location and work with your accountant to put together a representative basket of the purchases needed to run the business.

Add freight, handling, special delivery and any order charges to the cost of the products. Check minimum quantities, payment terms, returns policies and product shelf life. Large orders may reduce unit prices while increasing waste and storage requirements.

Then compare this basket with local offers that are genuinely equivalent in quality, pack size, service and delivery frequency. This comparison is intended to assess the financial commitment, not to assume that you can bypass mandatory suppliers.

Also ask for clarification on how prices are reviewed:

• Are prices guaranteed for a specified period?
• Is advance notice required before an increase?
• Who bears the cost of exchange rate fluctuations on imported products?
• Can surcharges apply to deliveries to remote locations?

Finally, test the impact of higher purchasing costs on your margins, without assuming that you will immediately be able to raise your selling prices. A franchise may suit your market yet become difficult to run if its supply arrangements are too expensive.

3. Understand rebates and the applicable disclosure requirements

Suppliers may pay the franchisor rebates based on the volumes purchased across the franchisee network. Ask who receives these payments, whether they are retained or passed on and, if they are passed on, on what terms. Do not assume that a rebate generated by your orders automatically belongs to you.

In Canada, franchise-specific rules are set at provincial level. In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 and its regulation govern pre-contractual disclosure. Among other things, the disclosure document must set out purchasing restrictions and the franchisor’s policy on volume-based rebates.

Subject to statutory exceptions, this document must be provided at least 14 days before any franchise-related agreement is signed or any consideration is paid. Have an independent lawyer check the requirements that apply to your transaction: a sales presentation is no substitute for statutory disclosure.

Quebec has no specific legislation requiring a comparable franchise disclosure document. The Civil Code of Québec, particularly its rules on good faith and contracts, still applies. Nevertheless, ask for the same financial information before committing. The absence of a mandatory document does not make purchasing terms any less important.

4. Plan for supply disruptions

Ask what happens if the designated supplier can no longer deliver, supplies products that do not meet specifications or ceases trading. Is there an approved backup supplier? Can you obtain temporary permission to buy locally? Who makes that decision, and how quickly?

Have the franchise agreement and the supplier’s terms reviewed together. In particular, check who is responsible for delays, defective goods and replacement costs. An obligation to buy exclusively from a supplier is not, in itself, a guarantee of delivery.

Key takeaway: before signing, obtain the list of mandatory purchases, a costed basket based on delivered prices, the rebate policy and the supply disruption procedure. These four elements will help you judge whether the supply arrangements are compatible with your business plans.