Buying a Franchise: Check Your Purchasing Obligations

When you buy a franchise, you often sign up to a purchasing arrangement too. Designated suppliers can ensure consistent quality and make day-to-day operations easier across the franchise network. However, purchasing obligations can also limit your ability to control costs and respond to supply problems. Before signing, establish exactly what you must buy, from whom and on what terms.

1. Map out your mandatory purchases

Ask the franchisor for a complete list of the goods and services you are obliged to buy. Look beyond the products customers see. The obligation may also cover packaging, cleaning products, workwear, equipment and ongoing services.

Distinguish between three types of arrangement:

• Specified supplier: You must buy from the franchisor or a named business.
• Approved suppliers: You can choose from several suppliers that meet the network’s requirements.
• Quality requirements: You choose your own supplier, but the product must meet certain specifications.

The distinction affects both your bargaining position and your ability to find alternatives. Ask whether using a recommended supplier is genuinely optional, or whether other terms make it compulsory in practice.

Draw up a purchasing list showing the supplier, the party you will contract with, the commitment period and any minimum purchase requirements. Also ask for copies of any supplier agreements you will need to sign yourself. An obligation to an external supplier does not necessarily end when the franchise agreement does.

Finally, establish who can approve an alternative supplier, what information you must provide and how quickly you can expect a response. A theoretical choice is of little use without a workable approval process.

2. Calculate the true purchase cost

A price list does not necessarily show what the goods will cost by the time they are ready for sale. Ask for an example of a complete order, including all additional charges and conditions. Then use your expected purchasing pattern to calculate the total cost.

Pay particular attention to:

• Delivery, handling and small-order charges.
• Minimum order sizes and requirements to order full cases.
• Discount tiers and the conditions for qualifying.
• Return rights, shelf life and responsibility for obsolete stock.
• The currency used and any price adjustment provisions.

A minimum purchase requirement can be a burden even if the unit price is attractive. If you have to order more than you can realistically sell, you tie up cash and increase the risk of waste. Also check whether promotions oblige you to buy particular goods, and who bears the loss on unsold promotional stock.

Ask whether the franchisor receives rebates, commission or other benefits from suppliers, and whether any of these are passed on to your business. Do not budget for a share unless the basis for it has been clearly agreed.

Where possible, compare prices with equivalent products and delivery terms outside the arrangement. The aim is not simply to find the lowest price, but to assess whether quality, logistics and support justify any price difference.

3. Understand Danish rules on purchasing restrictions

Denmark has no specific franchise legislation, no legally required standardised franchise disclosure package and no dedicated registration scheme for franchise agreements. You therefore cannot assume that a public authority has approved the network’s purchasing terms.

The Danish Contracts Act and general principles of contract law are central to your obligations. The Danish Marketing Practices Act may also be relevant to information you receive about matters such as purchasing benefits. Depending on the circumstances, general duties of loyalty and disclosure may require material information to be disclosed before the agreement is entered into.

The Danish Competition Act and relevant EU competition rules may affect exclusive purchasing obligations. A requirement to use specified suppliers is not automatically unlawful, but nor is it automatically lawful simply because it appears in a franchise agreement. The assessment depends, among other things, on the nature, scope and duration of the obligation and the specific market conditions.

Have an adviser with competition law experience assess any far-reaching restrictions. At the same time, keep legality and commercial viability separate: a lawful term can still be a poor deal for your business.

4. Agree on what happens when supplies fail

Test the purchasing arrangement against a practical scenario: your only approved supplier cannot deliver an essential item. Can you buy an equivalent product elsewhere, or must you stop selling it?

Agree on a procedure for back orders, quality defects and prolonged supply failures. It should set out whom to contact, what evidence is required and how a temporary alternative can be approved. Also clarify who handles complaints and pays any additional delivery costs.

Check how price changes are notified and what options you have if there are significant changes. Do not assume you can simply switch suppliers later if the agreement expressly prevents it.

Make sure the key points you have agreed are recorded in the binding agreements, and check that the supplier terms support them.

Practical rule of thumb: Sign only once you know what you must buy, the total cost and what you can do if the approved supplier cannot deliver.