Buying a franchise: how to assess mandatory stock purchases

When buying a franchise, you need to understand more than the initial investment and ongoing fees. An obligation to buy ingredients, goods or packaging from a designated supplier can also have a significant impact on your outlet’s profitability. Centralised purchasing has a legitimate role in franchise networks: it helps maintain consistent product quality and availability. Before signing, however, you need to establish how purchase prices are set, who bears the risk of unsold stock and what you can do if the supplier fails to deliver.

1. Establish exactly what you must buy centrally

Ask for a list of mandatory purchases, the current supplier price list, delivery terms and a sample order form. Distinguish between an obligation to buy directly from the franchisor, from a single designated supplier or from a choice of approved suppliers. Each arrangement gives you different scope to negotiate and resolve problems.

For each stock category, ask why the restriction is necessary. A specialist blend made to a proprietary recipe serves a different purpose from an ordinary cleaning product. The aim is not to reject centralised purchasing outright, but to distinguish measures that protect the franchise concept from restrictions whose benefit to the outlet is unclear.

In particular, check:

• whether the obligation covers the entire product range or only specified items;
• who can expand the list and how much notice they must give;
• whether there is a procedure for approving an alternative product;
• who decides which new products to introduce and the initial quantities to order;
• whether you must also buy seasonal or promotional stock.

You must be able to establish the scope of mandatory purchases before signing. If the franchisor can change it, ask what contractual limits apply to that power and how changes will be communicated.

2. Calculate the full cost of supply, not just the product price

The price list alone does not reflect your true costs. Add transport, packaging, any small-order surcharges, storage and expected losses from stock passing its expiry date. Compare costs on a consistent VAT basis; assess the cash-flow impact of VAT separately, according to your tax status.

Put together a representative basket of purchases based on your planned product range. For each item, record the order quantity, how much you can realistically use or sell, and the total cost of delivery. A lower unit price may not represent good value if you have to buy more stock than you can sell in time.

Also establish how the supplier changes prices. The contract should specify how changes are notified, when they take effect and whether they apply to orders already confirmed. If prices are linked to an objective benchmark, it must be clear which benchmark is used and how the calculation works.

Ask who receives volume discounts, rebates and credit notes. Central negotiations do not automatically mean that individual outlets receive all the benefits secured. Request an explanation of the mechanism, rather than simply a general promise of better purchasing terms.

Finally, test the impact of price increases for your most important inputs on the outlet’s finances. This is not a forecast, but a check on whether the business can cope with cost changes without relying on unrealistic sales growth.

3. Address minimum purchases and supply disruptions

Minimum purchase requirements may apply per order, month or year. Check whether they represent a commitment to take delivery of goods, a minimum spend or merely a condition for obtaining a discount. Also ask what happens if you fall short of the minimum and whether the requirement is reduced during the initial trading period.

Pay particular attention to stock with a short shelf life. Negotiate a minimum remaining shelf life on delivery, rules for rejecting non-compliant deliveries and responsibility for transport. For mandatory new products or seasonal ranges, clarify in advance whether unsold goods can be returned. In business-to-business transactions, there is generally no automatic right to return stock that is free from defects.

You need a specific procedure for supply disruptions:

1. Who should you notify when an essential item is unavailable, and how?
2. What is the deadline for a response and an alternative solution?
3. When may you temporarily buy elsewhere, and how must you demonstrate quality?
4. Who will bear any additional costs?

Distinguish between the supplier and the franchisor. If they are separate entities, simply recommending a supplier does not generally make the franchisor responsible for every mistake that supplier makes. Responsibility for arranging alternative supplies must therefore be clearly assigned.

4. Have the contractual and competition rules reviewed

The Czech Republic has no specific franchise legislation and no mandatory, state-prescribed disclosure document for prospective franchisees. Franchise agreements are generally concluded as contracts not specifically defined by law under Section 1746(2) of the Civil Code, Act No. 89/2012 Coll. General pre-contractual disclosure duties also apply. Stock supplies are governed primarily by the rules on sales contracts and the specific terms agreed.

Mandatory purchasing arrangements may also be subject to competition law, particularly Act No. 143/2001 Coll., on the Protection of Competition, and, depending on the circumstances, EU rules. Commission Regulation (EU) 2022/720 on the block exemption for vertical agreements is also relevant. It does not, however, automatically approve every restriction in a franchise agreement.

Exclusive purchasing arrangements are neither always prohibited nor always permitted. Their assessment depends, among other things, on their scope and duration, the parties’ market positions, and their importance in protecting know-how or maintaining consistent quality. A lawyer should review the franchise agreement, supply terms and relevant sections of the operations manual together.

Practical takeaway: Before signing, make sure your purchasing obligation is defined in writing, you have calculated the true cost of stock, and you have agreed a route to alternative supplies. Without these three elements, you cannot reliably assess the degree of dependence on the supplier you are accepting.