Franchising in Canada: setting clear rules for mandatory purchases

Turning an existing business into a franchise means reviewing how you buy supplies. Can a supplier that works well for your outlet serve several owners in different markets? Before recruiting franchisees, define what they must buy, from whom and on what terms. Across a franchise network, these decisions affect not only consistency but also profitability and trust.

1. Justify every mandatory purchase

Start by listing the products, equipment and consumables your business model requires. For each, distinguish between three options: an exclusive source, several approved suppliers, or unrestricted purchasing subject to specifications.

Exclusivity should meet a specific need, rather than simply replicate your existing habits. A signature ingredient may require a single source. Everyday supplies can often be bought locally, provided they meet measurable criteria.

Prepare an internal table setting out:

• the product or equipment concerned;
• the reason for the restriction;
• the minimum specifications required;
• the available suppliers and the regions they serve;
• the person responsible for approving an alternative.

This process exposes vulnerable dependencies. If only one manufacturer holds the specifications for an essential item, consider how you would keep the business running during a shortage. Also, avoid describing a supplier as ‘approved’ without checking its actual capacity to serve future outlets.

2. Test the delivered cost, not just the negotiated price

Your existing outlet is a starting point, but its purchasing terms may not be available to others. A discount based on a personal relationship, free local delivery or unusually flexible payment terms may not extend to a franchisee.

Compare the total cost of getting supplies to the outlet: price, transport, minimum order quantities, storage, wastage, lead times and payment terms. A cheaper order can tie up too much cash if it requires disproportionately large stock levels.

Ask suppliers for written terms covering the proposed locations. In particular, check who places orders, who receives invoices, who is responsible for returns and how complaints are handled. Do not promise volume savings before establishing the conditions needed to achieve them.

Also test an adverse scenario: a delayed delivery, higher transport costs or temporary unavailability. The aim is not to guarantee trouble-free supply, but to check that your purchasing requirements remain workable when conditions deteriorate.

3. Make restrictions and financial benefits transparent

Franchisees should not discover mandatory purchasing requirements after signing. Their scope and financial implications must be explained in the appropriate documents before a prospective franchisee commits.

In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 and its regulation govern pre-contract disclosure. The disclosure document must cover, among other things, purchasing restrictions and the franchisor’s policy on volume-based rebates. Subject to applicable exceptions, the rules generally require disclosure at least 14 days before a prospective franchisee signs a franchise-related agreement or makes a payment.

To prepare this information, identify the benefits that the franchisor or a related party may receive: discounts, commissions, rebates or revenue from direct sales of goods. Ask your lawyer to clarify what information is required in the province concerned, including any requirements relating to whether these benefits are shared.

Explain clearly whether a rebate benefits the franchisee, is retained by the franchisor or funds a specific function. Do not imply that every supplier benefit automatically reduces outlets’ costs.

In Quebec, there is no franchise-specific legislation that replaces the need for this assessment. The Civil Code of Québec, particularly its duties of good faith and disclosure, remains relevant. A restriction or financial interest that could influence a prospective franchisee’s decision to enter into the agreement deserves particular attention. Check the applicable rules in every province where you plan to operate.

4. Address alternatives and shortages in the contract from the outset

Ensure that the franchise agreement, pre-contract disclosure and purchasing procedures are consistent. The agreement should specify the scope of restrictions, the approval process and the authority to change suppliers. An operating procedure can then set out ordering and delivery-check processes, but should not be used to conceal a significant financial obligation.

Provide a mechanism for franchisees to propose an equivalent supplier. Define the supporting documents required, any testing needed, who pays the assessment costs and a stated response timeframe. Giving reasons for a decision helps franchisees understand the network’s shared requirements.

Finally, establish an emergency procedure: who authorises a temporary alternative, which specifications remain mandatory, and how are outlets told when normal arrangements resume? Keep a record of approvals to prevent a local exception from becoming an unwritten rule.

Key takeaway: before making your first franchise offer, assess three things together: why mandatory purchases are necessary, whether their costs can genuinely be replicated across outlets, and how transparently supplier benefits are disclosed. A sound purchasing policy protects the business model without imposing unexplained constraints on franchisees.