Franchise purchasing: check the mandatory suppliers

When you join a franchise network, you may not be free to choose where you buy your raw materials, goods or equipment. Centralised purchasing can help maintain consistent quality, but it can also create dependency. Start examining the supply arrangements while you are still choosing a brand: who sets the prices, who bears the stock risk, and what happens if the designated supplier fails to deliver? These are not minor operational details: they determine how much room you have to manoeuvre in your day-to-day business.

1. Map out what you must buy and from whom

First, distinguish between a mandatory supplier and a mandatory quality standard. Being required to order exclusively from a named wholesaler is not the same as being allowed to use any company that can demonstrate compliance with the required product specifications. In the first case, there is usually less scope to negotiate prices or find alternatives.

Create a purchasing table covering all important items. Do not limit it to goods for resale: packaging, uniforms, cleaning products, till systems and maintenance may also be tied to designated providers. For each entry, identify the responsible party and a specific supporting document; do not settle for a verbal explanation.

The table should include:

• the precise scope of the product or service;
• the approved supplier and the party to whom orders must be sent;
• the minimum order and delivery lead time;
• payment terms and any advance payment;
• the approval process for an alternative product or supplier.

Also clarify who your contractual counterparty is. If the franchisor merely passes on your order, it may not be the party against whom you can bring a claim under the purchasing contract if something goes wrong. Responsibility for invoicing, complaints and delivery should be clear.

2. Calculate the total purchasing cost, not just the list price

A seemingly cheap product can become expensive if delivery charges are high, large pack sizes are compulsory or its shelf life is short. Obtain comparable quotes for the same quality and ordering frequency. Do not judge the benefits of centralised purchasing solely by the unit price.

In your calculations, separate out discounts, freight, storage, expected wastage and the financing cost of paying in advance. Work with an accountant to calculate the cash-flow impact of VAT based on your own tax position. For transactions in a foreign currency, check which exchange rate is used and on what date.

A purchasing obligation can also become an obligation to finance stock. This is particularly important for opening stock packages, seasonal ranges or compulsory promotional stock. Ask whether unsold goods can be returned, whether credit is given for damaged deliveries, and who pays the return freight. Do not assume you have an automatic right to a buy-back: the terms must be set out explicitly.

Check the rules on price changes too. Is advance notice required? Is there a calculation method you can verify, and are confirmed orders protected? An unrestricted right to raise prices immediately is a risk that an attractive starting price alone cannot offset.

3. Understand the Hungarian legal framework

Hungary has no standalone franchise act, but that does not mean franchise agreements are unregulated. Act V of 2013, the Hungarian Civil Code, specifically recognises franchise agreements. General contract rules and the provisions governing individual purchasing agreements also matter. Alongside the franchise network’s shared quality objectives, you therefore need to consider the rights of the franchisee as an independent business.

Mandatory purchasing is not necessarily unlawful in itself: it may, for example, support consistent quality and protect know-how. Its treatment under competition law, however, depends on the wording and duration of the restriction and the market context. In Hungary, Act LVII of 1996, the Competition Act, is relevant; EU competition law also applies where trade between Member States is affected. The EU Vertical Block Exemption Regulation, Regulation (EU) 2022/720, may provide an exemption subject to specific conditions; it is not blanket permission for every restriction.

Do not confuse purchasing restrictions with setting retail selling prices. Mandatory minimum prices or fixed resale prices can pose serious competition-law risks. Even recommended prices can become problematic if compliance is effectively enforced through pressure or incentives. Have these clauses reviewed by a lawyer with franchise experience.

4. Have a workable response to supply failures

Do not base supply security on a general promise. Ask for a clear written procedure covering delays, stock shortages, quality defects and product recalls. Agree whom you must notify, how quickly they must respond, and under what conditions you may temporarily order elsewhere.

An alternative-supplier approval process is only useful if the requirements and decision deadlines are clear. A rule that allows exceptions only with permission, but provides no procedure for obtaining it, can easily become an operational obstacle. Naturally, food safety rules and other mandatory requirements must still be met when sourcing an urgent replacement.

Speak to several existing franchisees specifically about supply. Ask how reliable deliveries are, how complaints are handled, and how often they are left with unusable stock. Compare their experiences with the draft agreement: a good personal relationship is no substitute for an enforceable commitment.

Practical takeaway: accept mandatory purchasing only when you understand its full cost, the rules on price changes and the arrangements for resolving supply failures. Consistent quality also requires clear responsibilities and workable backup options.