Mandatory Purchasing for Hong Kong Franchises: Check Supply Prices, Minimum Orders and Stockout Liability Before Signing

When choosing a franchise, do not compare franchise fees alone. If you must buy ingredients, packaging, equipment and consumables from designated suppliers, this will have an ongoing impact on cash flow. Centralised purchasing can help maintain quality across a franchise network, but franchisees still need to know who can raise prices, who bears the cost of unsold stock, and whether alternative suppliers are allowed when stock runs out. Clarify these issues before paying or signing.

1. Establish what you must buy and verify the supply relationships

Ask the franchisor for a complete purchasing list, distinguishing between items that must be bought from head office, those that can be bought from approved suppliers, and those that simply need to meet quality specifications. Do not review only the main franchise agreement: the operations manual, equipment list and supply terms may also contain binding requirements.

Check the following details for each item:

• Contracting party: Does the franchisor, an associated company or an independent supplier collect payment and issue invoices?
• Supply terms: How are delivery lead times, minimum order quantities, delivery charges and payment periods determined?
• Acceptance and returns: What are the return or replacement arrangements for damaged goods, shortages, substandard products or goods with insufficient remaining shelf life?
• Equipment restrictions: Must you also buy specified consumables, maintenance services or software subscriptions?

If the franchisor requires you to contract directly with a supplier, review both agreements together. A promise by the franchisor to “help follow up” does not mean it accepts liability for the supplier’s breach of contract. You can also request disclosure of related-party relationships and purchasing rebate arrangements to understand whether the franchisor earns additional income from mandatory purchasing. This is a due diligence request, not an automatic statutory disclosure right for franchisees in Hong Kong.

2. Compare brands using the actual cost of each order

The unit price on a quotation may not represent the full cost of getting goods to your premises. When comparing brands, factor in transport, refrigerated delivery, minimum-order surcharges, storage, wastage and payment arrangements. For imported goods, also check the quotation currency, how exchange rates are calculated, and who handles import formalities.

Ask to see current price lists, previous price-change notices and verifiable order records. Where documents contain information about other franchisees, anonymised copies may be acceptable. With consent, speak to existing franchisees about their experience of deliveries and returns. If documents are unavailable, record this uncertainty as a risk rather than assuming costs will remain unchanged.

Pay particular attention to whether minimum order quantities are realistic given product shelf life and your premises’ storage capacity. A discount may look attractive, but paying upfront for substantial stock can still put pressure on cash flow. Your purchasing budget should also cover opening stock, seasonal packaging and consumables that become unusable after a branding or design change.

A simple comparison table can record the “minimum payment per order”, “estimated time to use the stock”, “time between paying for stock and receiving sales revenue” and “whether slow-selling stock can be returned”. This gives a clearer picture of whether the supply arrangements suit your financial resources than wholesale discounts alone.

3. Set out price increases, shortages and stock responsibilities clearly

Before signing, do not treat a clause requiring compliance with “prices and policies issued by head office from time to time” as an adequate solution. Ask a solicitor to help address the following terms and establish which document takes precedence if the franchise agreement, supply agreement and operations manual conflict.

Price increases: Specify how notice must be given, when changes take effect and which orders they apply to. Can prices be increased retrospectively for orders already confirmed and paid for? Is there a renegotiation process if costs change substantially? The agreement should also state whether the franchisor can introduce new purchasing obligations by amending the manual.

Alternative supplies during shortages: Set out delivery standards, shortage notification requirements and the approval process for alternative suppliers. Seek permission to buy temporary replacement goods that meet written specifications if the designated supplier fails to deliver on time, together with a deadline for the franchisor to respond. Do not assume that a stock shortage automatically entitles you to disregard mandatory purchasing terms.

Quality and recalls: Clearly define inspection and acceptance periods, evidence retention requirements, return and replacement delivery costs, and responsibility for tracing and recalling defective goods. Allocating responsibilities in the contract does not release either party from any legal obligations towards consumers or regulators.

Remaining stock: If the brand changes its designs, discontinues products or ends the franchise relationship, which unopened goods are eligible for buy-back? How will the buy-back price, delivery costs and payment deadline be determined? Without a written agreement, do not expect head office to take back stock.

4. Understand Hong Kong law: mandatory purchasing is not automatically lawful or unlawful

Hong Kong has no dedicated franchise legislation. Nor does it have a generally applicable mandatory pre-sale disclosure regime, franchise registration system or statutory cooling-off period for franchise transactions. You should therefore not assume that you can change your mind after paying a deposit, or that the franchisor is legally obliged to provide all supply information.

Purchasing and franchise arrangements are primarily governed by common law contract principles and relevant general legislation. The Sale of Goods Ordinance (Cap. 26) covers implied terms relating to matters such as the description, quality and fitness for purpose of goods. The Control of Exemption Clauses Ordinance (Cap. 71) may restrict the effectiveness of certain exclusion clauses, depending on the nature of the transaction and the provisions concerned. Pre-contractual misrepresentations may also raise issues under common law and the Misrepresentation Ordinance (Cap. 284), but whether damages or rescission are available depends on the facts of each case.

Hong Kong also has a Competition Ordinance (Cap. 619). Mandatory purchasing is not automatically unlawful simply because it restricts the choice of suppliers: the agreement’s terms, market conditions and effects on competition must be considered. However, if the supply arrangements also require franchisees to follow fixed or minimum resale prices, this may raise resale price maintenance concerns and should be reviewed separately by a legal adviser. Do not rely on outdated information claiming that Hong Kong has no competition law.

Practical summary: Before paying, obtain the purchasing list, complete price list and supply agreement. Then ensure that price increases, alternative supplies and stock handling are covered by enforceable terms. If the franchisor refuses to provide enough information to estimate your purchasing commitments, hold off and seek an assessment from a Hong Kong solicitor and accountant.