Buying a franchise: Check purchasing and supplier requirements

When you buy a franchise, you join a network with shared standards. This can give you access to tried-and-tested products and favourable purchasing agreements, but it can also tie you to particular suppliers. Before signing, check what you must buy, who you must buy from, and who bears the risk if goods fail to arrive or cannot be sold.

1. Map out all your purchasing obligations

Purchasing requirements are not necessarily set out in one place in the franchise agreement. They may also appear in the operations manual, supplier lists, product range requirements and separate purchasing agreements. Ask for all relevant documents and clarify which versions will become binding when you sign.

Draw up an overview for each major product category or operational service:

• Must you buy from the franchisor, a designated supplier or simply an approved supplier?
• Is the entire product range compulsory, or can you opt out of stocking certain products?
• Are there minimum orders, purchasing targets or safety stock requirements?
• Must you use particular packaging, fixtures and fittings, equipment or cleaning products?
• Can the requirements change, and how much notice will you receive?

Distinguish between quality requirements and supplier restrictions. A requirement to meet a particular product standard is not the same as an obligation to buy from one specific business. Ask the franchisor to explain why the restriction is necessary and how it benefits the franchise network.

2. Understand Danish rules on purchasing restrictions

Denmark has no specific franchise legislation, no franchise-specific registration scheme and no special statutory pre-contract disclosure documents. However, standard business registrations and any licences or permits required for the activity concerned may still be necessary. You should therefore take the initiative and insist on receiving the purchasing terms before you buy.

The franchise agreement is subject to the Danish Contracts Act and general principles of contract law. Following a case-specific assessment, section 36 of the Contracts Act may be used to amend or set aside unreasonable terms, but it is no substitute for negotiating clear terms in advance. The Danish Marketing Practices Act may also be relevant where misleading information is provided about purchasing benefits, for example.

Supplier restrictions must also be assessed under the Danish Competition Act and, where relevant, EU competition rules. The EU Vertical Block Exemption Regulation can provide a framework for lawful restrictions where its conditions are met. A restriction is neither automatically lawful because it appears in a franchise agreement nor automatically unlawful because it limits your choice.

The assessment depends, among other things, on the scope and duration of the restriction, market conditions, and its importance to the franchise concept’s shared identity and know-how. Ask an adviser with competition law expertise to assess extensive exclusive purchasing obligations. A franchising code of ethics is a supplement, not Danish law.

3. Calculate the cash tied up in stock – not just the purchase price

An attractive unit price can conceal a substantial strain on cash flow. Large minimum orders, advance payments and slow-selling goods may require more capital than your start-up budget suggests.

Ask for the specific supplier terms and a realistic proposal for your opening stock. Then calculate your total outlay, including carriage, packaging, storage and expected stock losses. Also consider when you must pay the supplier compared with when customers pay you.

In particular, check:

• Who pays for compulsory promotional stock that remains unsold?
• Can seasonal goods and surplus stock be returned, and on what terms?
• Who bears the loss if the network changes its product range or packaging?
• Do supplier discounts and rebates go to you, the franchisor or a shared scheme?

You are not necessarily entitled to a share of the franchisor’s supplier rebates. The allocation should therefore be clear so that you can assess the real purchasing benefit. Talk to existing franchisees about lead times, back orders and obsolete stock, rather than just discount percentages.

4. Agree a solution for supply failures

If an approved supplier fails to deliver, you could be left without stock while still being obliged to keep your business open. Clarify whether the franchisor actually undertakes to supply goods or merely refers you to an independent supplier.

Have a practical contingency procedure set out: who should be contacted, how quickly must they respond, and when may you buy equivalent goods elsewhere? Ideally, agree objective quality requirements and a fast approval process for alternative suppliers.

The purchase of goods itself may fall under the Danish Sale of Goods Act, but in business-to-business transactions many of its rules can be varied by agreement. You should therefore also read the supplier’s terms of sale covering defects, notification of claims, delays and limitations of liability. A promise of assistance from the franchisor does not necessarily give you an enforceable claim against the supplier.

5. Make the clarifications binding before you buy

Collect unanswered questions in a short purchasing checklist and have the key answers incorporated into the agreement or a signed annex. Also specify which document takes precedence if the franchise agreement, manual and supplier terms conflict.

Prioritise the right to source goods elsewhere when supplies fail, clear stockholding obligations and a procedure for changes. Then have your accountant check the capital requirements and your lawyer review the restrictions.

Practical takeaway: Do not simply buy access to a product range. Make sure the purchasing system can keep your business supplied without excessive cash being tied up in stock or unclear responsibilities.