Franchise Procurement: Supplier Rules Before Launch

In an independently owned business, the owner can quickly decide where to buy ingredients, materials or equipment. But when you turn an existing business into a franchise network, that same decision affects independent franchisees’ costs and operational reliability. Procurement rules therefore need to protect consistent quality across the network while ensuring reliable supplies. Before launch, it is worth establishing not just a supplier list, but also justifiable requirements, an approval process and a workable contingency plan.

1. Decide where common sourcing is necessary

Do not start from the assumption that franchisees should buy everything from the same sources as you. First, list the products and equipment that directly affect the customer experience, safety or the effectiveness of the operating procedures you provide. Then assign an appropriate rule to each procurement category.

It can be useful to create three groups:

• Items that must be sourced from a designated supplier: for example, an ingredient made to a proprietary recipe that gives the brand its distinctive character.
• Items that must be ordered from an approved supplier: several businesses may be able to meet the same documented requirements.
• Items that can be sourced freely: franchisees choose their own suppliers, provided they meet the specified technical or quality requirements.

Give a brief business justification for each restriction. “We have always done it this way” is not enough. For a piece of equipment, performance and ease of cleaning may be essential, while the identity of the manufacturer may not be. An overly narrow list can create unnecessary costs and dependence on particular suppliers.

It is also worth identifying items whose absence would bring operations to an immediate halt. For these, a backup supplier may matter more than a small discount.

2. Check Hungary’s legal and competition law framework

Hungary has no standalone, comprehensive franchise act, but it would be wrong to say that franchise agreements are unregulated. Act V of 2013, the Hungarian Civil Code, expressly recognises franchise agreements as a distinct contract type, and its general contractual provisions apply alongside the specific franchise rules. Those rules also address procurement, so your chosen arrangements need to be assessed in that context.

Mandatory sourcing may also require a competition law review. In Hungary, Act LVII of 1996 is relevant, as is Article 101 of the Treaty on the Functioning of the European Union where EU competition rules apply. Commission Regulation (EU) 2022/720 provides an important framework for assessing vertical agreements under EU law, but it does not automatically exempt every franchise clause.

The assessment of exclusive purchasing obligations may depend on factors including their duration, the market position of the parties and the nature of the restriction. Common sourcing arrangements do not automatically entitle you to fix franchisees’ retail prices. Even recommended prices can become problematic if compliance is effectively enforced through pressure or incentives.

There is no general, dedicated official franchise register or mandatory-format franchise disclosure document in Hungary. However, pre-contractual duties to co-operate and provide information still apply. Significant procurement restrictions should therefore be explained clearly in advance. The European Code of Ethics for Franchising is a self-regulatory instrument, not legislation.

3. Make the full cost of ordering transparent

An attractive unit price alone does not prove that a supplier is suitable for franchisees. Ask for a quotation that makes both the total procurement cost and the operational burden clear.

Record at least the following:

• minimum order quantities and pack sizes;
• delivery areas, frequency and committed lead times;
• delivery charges, payment terms and the procedure for price adjustments;
• arrangements for handling defective supplies, returns and complaints;
• warranties, maintenance and spare parts availability, where relevant.

Check whether a lower-turnover franchisee can also order economically. The larger order volumes of your own outlet may secure discounts that a new unit cannot obtain. With food, for example, an excessive minimum order can lead to stock wastage.

If the franchisor receives commission, rebates or other benefits from the supplier, it is advisable to explain clearly how these are treated. Specify whether the benefit is retained as head office revenue, funds shared objectives or is passed on partly to franchisees. Transparency can help prevent conflicts of interest.

4. Create a substitution and approval process

An exclusive sourcing requirement must always be accompanied by a plan for stock shortages, delivery delays or quality problems. Franchisees should not be forced to choose between closing their business and breaching their contract.

Appoint a contact person and specify the information needed to approve a substitute product. This might include a product description, composition, compliance documentation, a sample or trial results. Set out response deadlines and an emergency procedure in advance.

For example, if packaging is unavailable, do not assess an alternative solely on whether it is the same size. Suitability for food contact, the ability to seal it securely and durability during transport may also matter. Any temporary approval should identify the product, its permitted uses and the expiry date.

Base any rejection of a new supplier proposed by a franchisee on documented quality or operational grounds. A consistent process also builds trust across the franchise network.

5. Align contracts with day-to-day practice

The franchise agreement should set out the core procurement obligations, the approval process and the framework for making changes. Detailed product specifications can be managed in a separate schedule or a controlled procurement list. Do not try to introduce significant financial burdens simply by changing a list without appropriate contractual authority.

The supplier agreement should genuinely support the commitments made to franchisees. Clarify who places orders, who is invoiced, who can raise complaints and who bears the consequences of defective or late supplies. When introducing a new product, allow time to use up existing stock and manage the transition.

Practical takeaway: before launch, make sure every critical item has a justified sourcing rule, transparent costs, a designated person responsible and an alternative that can be approved. Have contractual restrictions reviewed by a lawyer experienced in franchising and competition law.