Buying a franchise: check mandatory purchasing arrangements

Joint purchasing within a franchise network can deliver consistent quality, reliable supplies and stronger bargaining power. For a prospective franchisee, however, the key question is what your own business will be required to do: who you must buy goods and services from, on what terms, and what happens if supplies are disrupted. Check purchasing obligations before committing, as a seemingly affordable start-up can tie up substantial funds in stock and ongoing purchases.

1. Identify all mandatory purchases

Ask the franchisor for a written list of purchases you must make from the network or its nominated suppliers. Do not limit your review to products sold to customers. The obligation may also cover packaging, workwear, cleaning products, equipment maintenance, payment terminals and software services.

Divide the list into three categories: purchases that must be made exclusively from a nominated source, purchases permitted from approved alternative suppliers, and purchases you are free to make elsewhere. Also establish whether each obligation covers an entire product category or only specific items.

Alongside the franchise agreement, ask to see the purchasing schedules, relevant provisions in the operations manual and suppliers’ terms and conditions. In particular, check:

• Who sells and invoices the goods or services ordered?
• Who will be your contractual counterparty for the supply or service agreement?
• Is the minimum order specified in euros, units or number of deliveries?
• Can you buy an equivalent product elsewhere, and how do you obtain approval?
• Which document takes precedence if the terms conflict?

Also establish whether supply agreements automatically form part of joining the network or must be signed separately. A framework agreement negotiated by the franchisor does not, on its own, tell you what payment or ordering obligations your business will have. Ask for a sample order confirmation and invoice to see how the terms work in practice.

2. Calculate the total cost, not just the purchase price

A product price list alone is not enough to compare franchise networks. Calculate the total cost of a typical order, including transport, handling, packaging charges, cold-chain costs, any import costs and wastage. Compare costs on a consistent basis and separate recoverable VAT from the actual cost. Still take account of its effect on the timing of cash payments.

Ask how long the price list remains valid and how prices are set. Check whether discounts are unconditional or depend on purchase volumes, timely payment or targets for the network as a whole. Do not treat a conditional annual rebate as a guaranteed monthly saving.

Also ask whether the franchisor receives purchase-related rebates from suppliers and whether these are passed on to franchisees. A payment received by the franchisor is not in itself evidence of a problem, but you should understand its significance. What matters is whether you can assess your own purchase price and the value the network provides without relying on assumptions.

Where possible, compare products of equivalent quality. A cheaper alternative is not a meaningful benchmark if its pack size, delivery frequency or shelf life differs substantially from the network’s product.

3. Test the funding needed for stock and payment terms

Mandatory opening stock can tie up money long before the first sales revenue arrives. Ask for an itemised breakdown and an explanation of the quantities. Establish whether these quantities are recommendations or contractual obligations, and whether orders can be phased as the business gets under way.

Prepare a cash flow forecast showing purchase payment deadlines separately from customer receipts. Also test a scenario in which sales build more slowly than expected but minimum purchasing obligations continue. This will show how much of your own money or working capital finance you need beyond the opening budget.

Before discussing finance, clarify at least the following terms:

• Must the first deliveries be paid for in advance?
• Does the supplier require security or a deposit?
• When does ownership of the goods pass to your business?
• Can slow-moving products or those approaching their expiry date be returned?
• Who is responsible for stock left over after a promotion?

If the supplier retains ownership of the goods until payment, tell your finance provider. Do not assume that all stock will be accepted as security for funding. Also make sure your working capital calculations do not depend on supplier credit that has yet to be approved.

4. Agree procedures for supply disruptions and defects

Committing to a single purchasing channel increases your dependence on the supplier’s ability to deliver. Ask the franchisor how product availability is monitored and what you are permitted to do if a mandatory supplier cannot fulfil an order.

The agreement should set out a clear exception procedure: who must be notified of a disruption, who approves a substitute product and how quickly a decision must be made. Alternative products must still meet the agreed quality and safety requirements. Do not interpret silence as permission to buy elsewhere unless this procedure has been expressly agreed.

Also check the deadlines for reporting problems, the procedure for returning defective products, and responsibility for damage in transit and product recalls. An assurance from the franchisor that it will handle the matter does not establish who will reimburse your costs. Record responsibilities in agreements between the appropriate parties and check any limitations of liability.

Ask existing franchisees specific questions about delivery punctuality and how complaints are handled. A single experience should not determine your choice, but repeated reports of the same issue warrant further investigation.

5. Have the legal limits of purchasing terms reviewed

Finland has no specific franchising legislation, statutory franchise disclosure document or special registration system for franchise agreements. Purchasing terms are governed by legislation including the Finnish Contracts Act, the Unfair Business Practices Act and the Competition Act. EU competition rules may also apply.

A mandatory purchasing channel is not automatically prohibited. Its assessment may take account of factors such as protecting the quality of the franchise concept, the duration and scope of the restriction, and the parties’ market positions. The EU Vertical Block Exemption Regulation (EU) 2022/720 is one of the key pieces of legislation in this assessment. Its application is subject to conditions; falling outside the regulation does not, in itself, make an agreement unlawful.

Have a lawyer with competition law expertise assess extensive exclusive purchasing obligations. Also distinguish purchasing obligations from resale price maintenance: imposing minimum or fixed resale prices is, as a general rule, a prohibited restriction of competition. The Finnish Franchising Association’s Code of Ethics is a form of self-regulation, not legislation, and is no substitute for reviewing the agreement.

Practical checklist: before signing, compile a single purchasing table showing the mandatory supplier, total cost, payment period, minimum purchase requirement and fallback procedure for supply disruptions. If anything remains unclear, resolve it before committing.