Franchise purchasing: what are you committing to with a mandatory supplier?

Consistent quality across a franchise network often depends on shared ingredients, products and packaging. A designated source of supply is therefore not necessarily a disadvantage: it can simplify operations and make the range more predictable. As a prospective franchisee, however, you also need to know what this restriction will cost, who is responsible for delivery and how you can keep your business open if the mandatory supplier fails to deliver.

1. Map out what you must buy and from whom

The statement “you must use products approved by the network” is not enough to inform a purchasing decision. Having to order a few signature ingredients centrally carries a different risk from being required to buy every consumable from an exclusive source.

Ask for a schedule broken down by product category, setting out:

• which items you must buy directly from the franchisor;
• where you can choose between several approved suppliers;
• where meeting a technical or quality specification is sufficient;
• who can amend the mandatory product list, and what notice they must give;
• how you can apply for approval of a new supplier.

A quality specification is not the same as an exclusive purchasing obligation. If another source can provide the same quality, ask what documents, samples or tests you can use to demonstrate equivalence. It is also worth agreeing a deadline for approval and any testing fees.

Clarify who will be the seller under the purchase contract. Simply because the franchisor designates a wholesaler does not necessarily mean the franchisor is the seller or the party responsible for delivery. This determines whom you can notify of defects and whom you can require to fulfil the order.

2. Compare more than the unit price

The true cost of purchasing goes beyond the price list. Ask for a current price list, ordering terms and a sample order suited to the size of your planned business. Make comparisons on a like-for-like basis for pack size, quality and VAT treatment.

Include delivery, packaging, pallet or returnable packaging charges, any foreign exchange exposure and the effect of payment terms in your total cost calculation. Check minimum order requirements, the compulsory product range and how long the goods can safely be stored. An ingredient with an attractive unit price can end up being expensive through wastage if you have to order too much at once.

Ask whether you will benefit from the network’s volume discounts and on what terms. A supplier commission or rebate paid to the franchisor does not automatically entitle you to a share; however, contractual provisions on accounting for these payments and transparency are important negotiating points.

Pay particular attention to the mandatory opening stock. Ask for a justification of the quantities and rules for handling damaged goods, products with a short remaining shelf life and incorrect deliveries. Do not assume the supplier will later take back unsold stock.

A useful test is to put together orders for both an average month and a quieter month. This will show whether minimum order requirements accommodate demand or force you to build up stock that may be difficult to sell.

3. Understand the Hungarian legal framework

Hungary has no standalone, comprehensive franchise act, but the relationship is not unregulated. Act V of 2013, the Hungarian Civil Code, expressly recognises franchise agreements under the term “jogbérleti szerződés”. Alongside its franchise-specific rules, the general provisions on contracts and breach of contract are relevant, as are the rules on sales contracts for individual purchases.

The Civil Code also addresses purchasing restrictions and the use of alternative sources if the franchisor fails to perform. However, do not assume this gives you an unrestricted right to order elsewhere whenever an external supplier is late. The wording of the contract, the identity of the seller and the conditions for alternative purchasing must be considered together. Clarify with a lawyer what notice is required and whether you must allow an additional period for performance.

Exclusive purchasing arrangements may also require a competition law assessment. Hungary’s Act LVII of 1996 may be relevant, as may EU competition rules where an agreement affects trade within the EU. A restriction is not lawful or unlawful simply because it appears in a franchise agreement. Its substance, duration and market context all matter.

There is no general requirement for a separate pre-contractual franchise disclosure document. This does not remove the duties to cooperate and provide information during contract negotiations: obtain the purchasing terms before making your decision.

4. Agree a workable procedure for supply disruptions

A general promise that “head office will help” is of little use when a key product runs out. Ask for a written procedure setting out how you report a shortage, who will respond and when you may order a substitute product.

The agreement should cover emergency approval, pre-approved backup suppliers, evidence of quality and how additional costs will be accounted for and allocated. Also define the conditions for returning to normal purchasing arrangements. Product safety, traceability and information requirements continue to apply when substitutes are used.

Before signing, work through a specific scenario together: your main ingredient fails to arrive, but you already have customer orders to fulfil. If it is unclear who is responsible, how quickly a decision must be made or what solution is permitted, the contract still needs clarification.

Practical takeaway: only commit to mandatory purchasing with an itemised product list, a complete picture of the costs and a written procedure for alternative sourcing.