Buying a franchise: check the compulsory purchasing terms

Joining a franchise network gives you access to an established business concept, but it may also commit you to buying products and supplies from specified sources. Centralised purchasing can simplify day-to-day operations and support consistent quality. Before buying a franchise, however, you need to establish what you must buy, from whom and on what terms. The real impact of a purchasing obligation becomes clear when you look at how much of your sales revenue your business retains and whether you can continue serving customers during supply disruptions.

1. Establish the full scope of the purchasing obligation

Ask the network for a written list of compulsory purchases and approved suppliers. Do not settle for a general clause requiring you to stock the network’s product range. Establish whether the obligation covers products for resale, raw materials, packaging, workwear, cleaning products or other everyday supplies as well.

Distinguish between three things: a mandatory product, a mandatory supplier and a mandatory ordering channel. For example, the network may require a particular quality standard but allow several suppliers. Conversely, the agreement may prohibit buying even an approved product directly from its manufacturer. These distinctions have practical implications for prices, delivery times and your ability to seek competitive quotes.

Check the documents for answers to at least the following questions:

• Which purchases must be made from the franchisor or a designated supplier?
• Is the obligation exclusive, or can you buy some items elsewhere?
• Are there minimum orders, required purchase volumes or minimum stockholding requirements?
• Who approves an alternative product or supplier, and how do you apply for approval?
• Which purchasing terms become binding on your business when you place your first order?

Also ask to see any separate supply agreement and the supplier’s general terms and conditions. The franchise agreement may not cover matters such as cancelling orders, returns or the consequences of late payment. At the same time, confirm which company is the actual seller for each purchase.

2. Calculate the total purchasing cost

A product’s unit price alone will not tell you whether the purchasing model works for your business. Include transport, handling, any small-order surcharges, storage and wastage. Check payment terms too: paying for goods before you sell them ties up cash, even if the gross margin looks adequate on paper.

Ask for an up-to-date price list, delivery charges and the conditions for discounts. If the network presents centralised purchasing as a competitive advantage, ask what comparison supports that claim. A large combined purchasing volume does not, by itself, demonstrate that the total cost for your particular outlet will be competitive.

Also establish whether the franchisor receives volume-based rebates or other benefits from suppliers, and whether these are passed on to franchisees. Do not assume that you are automatically entitled to them or that their value will automatically be disclosed to you. Ask for a written explanation of the arrangement so that you can assess the network’s purchasing model without making unfounded assumptions.

Using your own projected sales volume, put together a basket of purchases for a typical operating month. Then model a lower-demand scenario in which the minimum order remains unchanged but stock turns over more slowly. This will help you see whether the main risk lies in prices, stock levels or delivery frequency.

Finally, check how prices can be changed. Who decides on a change, how is it communicated, and does the new price apply to orders already confirmed? Where possible, negotiate a defined notice period and a clear procedure for significant changes. Put the agreed requirement into a contract clause rather than relying on a verbal promise.

3. Agree a procedure for supply disruptions

A mandatory supplier creates a dependency. If a delivery is delayed or a product is discontinued, your ability to deliver what you have promised customers may be at risk, even though you did not cause the problem. It is therefore worth establishing an alternative sourcing procedure before placing your first order.

Ask the network to explain how supply interruptions are handled. Who notifies you of a disruption, who finds a replacement product, and who can authorise you to buy elsewhere? In an urgent situation, an approval process is of little use if no decision-maker or response time has been specified.

Agree in writing at least the criteria for approving alternative purchases, the contact person and the procedure for urgent situations. Also specify how the quality of a substitute product must be demonstrated. The requirements of the shared business concept and reliable supply should support each other, rather than prevent a problem from being resolved.

Separately check the deadlines for reporting faulty goods, the costs of returns and the terms for replacement deliveries. Do not assume that the franchisor is responsible for an independent supplier’s failings. Responsibilities must be established for each contractual relationship, along with any limitations of liability.

4. Have the legal limits of the obligation checked

Finland has no dedicated franchising legislation, no statutory franchise disclosure document in a prescribed format and no specific registration system for franchise agreements. Purchasing obligations are therefore assessed on the basis of the contracts and general legislation. This makes careful due diligence particularly important.

The Finnish Contracts Act applies to contracts, and section 36 allows an unreasonable term to be adjusted where the relevant legal conditions are met. The Sale of Goods Act may apply to purchases of goods; in business-to-business transactions, parties can generally agree to depart from its provisions. The Unfair Business Practices Act prohibits, among other things, conduct contrary to good business practice and misleading statements.

The Finnish Competition Act and, depending on the circumstances, EU competition rules may also affect the assessment of exclusive purchasing obligations. A mandatory purchasing channel does not in itself make a clause unlawful, but nor should it be assumed to be automatically permissible. Relevant factors may include the scope and duration of the obligation and market conditions. Ask a lawyer with competition law expertise to review any unclear arrangements.

The Finnish Franchising Association’s Code of Ethics is a form of industry self-regulation, not legislation. Establish whether the network is committed to it, but still have the purchasing terms reviewed separately. Give your adviser both the franchise agreement and the supply terms: your rights cannot be reliably assessed from just one of them.

Practical reminder: sign only once you know the total cost of compulsory purchases and how you will obtain goods during a supply disruption. Record negotiated exceptions and approval procedures in the agreement.