Franchise network purchasing: agree the ground rules for supply

When you turn your existing business into a franchise network, your established suppliers may not offer new franchisees the same terms as your own outlet. Your purchasing model needs to establish what franchisees buy, from whom and where responsibility lies. A carefully designed model protects the quality of the concept without leaving franchisees tied to unclear purchasing obligations or dependent on a single supply channel.

1. Separate essential purchases from recommendations

Start with your own business’s purchase invoices and supplier agreements. Identify the products, ingredients, equipment and supplies needed to deliver the concept. Do not simply make your entire current shopping list compulsory for future franchisees: the founder’s preference for a particular supplier does not, in itself, make that supply channel essential to the concept.

Divide purchases into three groups:

• Purchases essential to the concept: consistency or a specific quality requirement calls for a precisely defined product or solution.
• Purchases from approved suppliers: several options are available, but they must meet shared requirements.
• Purchases franchisees are free to source competitively: a shared supply channel has no material bearing on the promise made to customers.

Record the reason for each restriction. It might relate to product safety, compatibility or following a recipe, for example. This helps franchisees understand the obligation and advisers assess whether it is permissible.

Also define the procedure for approving alternative products. Who assesses a proposal, what samples or supporting information are needed, and what is the target timeframe for a decision? Without a procedure, the approved supplier list can effectively become a closed system.

2. Establish who buys and who is responsible for delivery

Joint purchasing can mean different things. The franchisor may negotiate a framework agreement under which franchisees order directly from the supplier. Alternatively, the franchisor may buy products and resell them to franchisees. The contractual relationships, invoicing and handling of problems differ between these models.

Draw a simple diagram for each key supply chain, showing the seller, buyer, invoicing party, supplier and recipient of complaints. Then check that the agreements reflect the diagram. A price list negotiated by the franchisor does not, on its own, mean that the supplier has committed to supplying every future outlet.

Check at least the delivery area, minimum order, ordering schedule, payment terms and conditions for opening an account for a new franchisee business. Establish separately whether security or advance payment is required. Credit granted to your own business does not automatically extend to an independent franchisee.

Also agree how to handle damage in transit, missing products and quality defects. Franchisees need to know whom to notify of a problem and where to order replacements. If the franchisor acts as the seller, its responsibilities should not be described as equivalent to those of a party merely coordinating joint purchasing.

Before expanding, test one complete ordering cycle using the proposed operating model. Look beyond placing the order to receipt of goods, invoicing, credits and communication when things go wrong. Informal arrangements that work at your own outlet may not work between several independent businesses.

3. Make purchasing obligations and financial benefits transparent

Finland has no separate franchise act, franchise-specific registration requirement or specific statutory pre-contractual disclosure document. Purchasing terms are assessed under general legislation. Key laws include the Contracts Act, the Competition Act, the Unfair Business Practices Act and, for sales of goods, the Sale of Goods Act. EU competition rules may also apply.

Freedom of contract does not mean that every purchasing restriction is permitted. Exclusive purchasing obligations and terms requiring the use of approved suppliers must be assessed according to their substance and effects. The EU Vertical Block Exemption Regulation may be relevant to that assessment, but it does not automatically permit all purchasing restrictions in franchise agreements. Have the obligations reviewed by a lawyer specialising in competition law.

The Finnish Franchising Association’s Code of Ethics is a form of self-regulation, not legislation. Its role must be distinguished from statutory obligations and the terms agreed between the parties.

Before franchisees commit, explain how the purchasing model affects their costs. For example, disclose whether the franchisor receives purchasing rebates from suppliers, whether these are based on the entire network’s purchasing volume and whether any benefit is passed on to franchisees. If the franchisor earns a margin on resale, explain that commercial role clearly.

Do not promise that joint purchasing will always be the cheapest option on the market. Benefits may also come from reliable supply, compatibility or reduced administrative work. Compare total costs, including freight, storage, wastage and payment terms as well as the purchase price.

4. Create a fallback plan for supply disruptions

Using a single supplier can simplify day-to-day operations, but a disruption may then affect the entire franchise network. Establish a contingency procedure for key products before the first interruption occurs. This need not mean routinely buying from several suppliers; it means agreeing in advance how to respond when normal arrangements fail.

Define when franchisees may use a substitute product and when the franchisor’s approval is needed. Also set out the circumstances in which sales must stop because safety or the promised quality cannot be assured. Urgency must not lead to undocumented substitutions.

Appoint someone to oversee the purchasing model and monitor supply shortfalls, the time taken to resolve problems and franchisee feedback. If the same problem recurs, review the supplier agreement and ordering practices before requiring franchisees to hold more stock. Extra stock ties up franchisees’ money and may not address the cause of the disruption.

Keep essential purchasing obligations and responsibilities in the agreement. Put day-to-day ordering instructions, contact details and procedures for handling problems in the operations manual. Do not use updates to the manual to impose substantial additional financial obligations without a proper contractual basis.

Practical checklist: before recruiting franchisees, prepare a purchasing table showing each mandatory product, permitted supplier, buyer, cost basis, responsibility for defects and fallback option. If any item remains unresolved, settle it before claiming that the purchasing model is ready.