Buying a Franchise: Check Purchasing Restrictions and Supply Obligations

Consistent products and reliable quality strengthen a franchise network. To achieve this, many networks require their franchisees to buy certain goods exclusively from the franchisor or approved suppliers. Before joining, check whether these restrictions are backed by firm commitments to supply. Purchase prices, minimum quantities and a lack of alternatives can put financial pressure on an otherwise promising outlet.

1. Establish the scope of compulsory purchasing

A purchasing restriction specifies which goods or services you must obtain from particular providers. It may cover the core product range, but also packaging, cleaning products, workwear or other operating supplies. The franchise agreement is not the only document that matters: schedules, purchasing terms and mandatory product lists may also contain obligations.

Before signing, request a complete overview. Place each item in one of three categories: compulsory purchasing from the franchisor, purchasing from approved suppliers, or unrestricted purchasing subject to quality standards. If any item's status remains unclear, ask for written clarification.

In particular, ask the following questions:

• Which products must you stock and reorder on an ongoing basis?
• Are there minimum order quantities, minimum purchase values or fixed ordering intervals?
• Must you automatically accept new products and promotional stock?
• Can you propose equivalent products from other suppliers for approval?
• Who makes that decision, and within what timeframe?

Also distinguish between a mandatory product range and a sales guarantee: an obligation to take stock does not mean the franchisor guarantees that you will sell it on. You may bear the entire inventory risk.

2. Calculate the full cost of getting stock into storage

Do not compare list prices alone. Your calculations need to include the full landed cost, covering freight, packaging, refrigeration surcharges and other procurement costs. You must also account for the financial burden of storage, spoilage and tied-up capital.

Request current price lists, discount tiers, payment terms and the rules governing price changes. Ask whether savings from collective purchasing are passed on to franchisees and whether the franchisor receives payments from suppliers. There is no blanket entitlement to disclosure or to a share of all such benefits; the specific contractual terms are decisive.

Prepare a cost comparison for a typical basket of goods. Compare like-for-like quality, delivery frequency and services. A higher price may be justified by reliable deliveries in small quantities; a lower price may lose its advantage if minimum order quantities are excessive.

Then stress-test two scenarios: rising purchase prices and lower sales. How would these affect gross profit, stock levels and cash flow? Purchasing commitments should remain affordable even if your business sells less than planned. Record which order quantities can actually be adjusted.

3. Agree supply commitments and alternative sourcing arrangements

A strict purchasing obligation is of little help if the designated supplier has no corresponding obligation to deliver reliably. Check who your contractual counterparty will be when buying goods. The franchisor may specify the product range while a legally independent supplier handles orders and deliveries. In that case, the franchisor is not automatically responsible for every supply disruption.

Ask for clear provisions on order acceptance, delivery times, part deliveries and shortages. For perishable goods, transport conditions and an agreed minimum remaining shelf life on delivery are also important.

A written contingency arrangement is particularly valuable. It should answer the following questions:

• At what point can you buy elsewhere if supplies fail?
• What evidence of quality is required?
• Who can grant approval at short notice, and who acts as their deputy?
• What happens if no response arrives in time?

Do not assume that you can simply use goods from other sources during a shortage. Agree in advance when alternative sourcing is permitted and what limits apply. Also clarify whether additional procurement costs are to be reimbursed, and under what conditions.

4. Understand the legal limits

Germany has no dedicated franchise act and no franchise-specific government authorisation or registration procedure. Purchasing and supply agreements are governed principally by the German Civil Code (BGB), where applicable the German Commercial Code (HGB), and German and EU competition law. Pre-contractual disclosure duties arise in particular under sections 311(2) and 241(2) BGB.

Standard-form purchasing clauses are subject to review under sections 305 to 310 BGB, particularly the test set out in section 307 BGB. Even in business-to-business contracts, such clauses must be sufficiently transparent and must not place the other party at an unreasonable disadvantage. Whether a particular provision is enforceable depends on its wording and the wider contractual context.

Exclusive purchasing obligations may also raise competition law issues. They are neither prohibited as a general rule nor automatically permissible simply because they support consistent quality standards. Have their scope, duration and potential justification assessed by a lawyer experienced in franchise and competition law.

5. Allocate stock risks before signing

Finally, clarify who will take responsibility for unsaleable promotional stock, discontinued products and remaining stock when the agreement ends. Wherever possible, agree specific return terms covering condition, remaining shelf life, return deadlines, valuation and transport costs. Do not assume there is an automatic obligation to buy stock back; any potential claim requires a case-by-case assessment.

Where a transaction qualifies as a commercial transaction for both parties, the duty to inspect goods and notify the seller of defects under section 377 HGB may also apply. Put in place a documented goods-in procedure and a process for reporting defects promptly.

Practical conclusion: Sign only once compulsory purchasing, total procurement costs, responsibility for supply and alternative sourcing arrangements work together. Robust supply provisions protect not just your business, but the reliability of the entire franchise network.