Buying a Franchise: Check Mandatory Purchasing Terms

An appealing brand does not necessarily offer supply arrangements that suit your outlet. In franchising, buying from designated suppliers can maintain consistent quality, but it can also create dependency. Before buying a franchise, investigate not just who the suppliers are, but also how prices are set, orders are fulfilled and losses are handled when supplies cannot be used.

1. Map out purchasing obligations and responsibilities

Ask for a written list of the ingredients, products and packaging that must be bought through the franchisor or its designated suppliers. Distinguish between items that must come from a single source and those you may buy locally, provided they meet the required specifications. Do not assume that the same rules apply to everything your outlet needs.

For each category, record the legal entity selling the goods, who receives payment, who issues invoices and who handles complaints. If the supplier is a separate company, ask whether the franchisor also guarantees order fulfilment or merely introduces the supplier.

Indonesia specifically regulates franchising through Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. Franchise operations are governed by a franchise agreement. Contractual relationships are also subject to the general provisions on agreements in Book III of the Indonesian Civil Code.

However, do not assume that these rules automatically give you the right to buy from alternative suppliers or receive compensation whenever a delivery is late. The procurement rights you need should be checked and clearly set out in documents that bind the relevant parties.

Ask for sample order forms, the supplier’s terms of sale and complaints procedures before accepting any purchasing obligation. These documents may determine practical responsibilities that are not apparent in the sales presentation.

2. Calculate the cost of supplies ready for use

A supplier’s price list does not show the full cost. To assess whether the offer is commercially viable, use the total cost of supplies delivered to your outlet, then account for the quantity you can actually use or sell.

Check the following:

• Item prices and whether the quoted prices include tax.
• Delivery charges, special handling and cold-storage requirements.
• Minimum purchases per item and per delivery.
• Pack sizes and shelf life once opened.
• Advance payment requirements or credit terms.
• Potential spoilage, expiry or surplus caused by ordering too much.

For example, supplies with a lower unit price may not be more economical if the minimum order exceeds what your outlet can sell before they expire. Assess your requirements against conservative sales forecasts, rather than relying solely on projections for a busy opening period.

Ask for any available history of price and delivery charge changes. Find out how much notice is given before new prices take effect and whether orders already accepted retain the previous price. If volume discounts are mentioned, make sure their conditions, who receives the benefit and when they are applied are recorded in writing.

Run a simple test: would the outlet still generate an adequate margin if supply costs rose but selling prices stayed the same? The results will help you decide whether to negotiate order sizes, delivery schedules or price-change terms before buying the franchise.

3. Clarify your rights when goods are damaged or supplies are disrupted

An obligation to buy from a single source should come with a workable procedure for when that source fails to fulfil orders. Ask about normal delivery schedules, ordering cut-off times and how to check stock availability before paying.

For damaged or non-compliant goods, agree at least the following:

• Acceptable condition and remaining shelf life on arrival.
• Evidence required, such as photographs, batch numbers and temperature records where relevant.
• A reasonable deadline for submitting complaints.
• Who pays return delivery costs.
• Whether the remedy is replacement goods, a refund or a credit against an invoice.

Distinguish between damage during delivery and damage caused by storage at the outlet. The contract should help establish when risk passes to you, rather than simply stating that all goods dispatched become the recipient’s responsibility.

For stock shortages, propose a process for approving alternative suppliers: who grants approval, which specifications must be met and when a decision must be made. This is something to negotiate, not an automatic right to substitute supplies as you please. Product quality and safety must still be maintained.

4. Test how the arrangements work before committing

Ask for anonymised examples of procurement transactions, from ordering through to complaint resolution. Compare actual practice with the terms being offered to you. If your outlet will be far from the supplier’s warehouse, request a delivery quote for your specific location rather than relying on costs for a nearer outlet.

Prepare a one-page checklist covering mandatory items, suppliers, delivered costs, minimum orders, delivery deadlines, returns terms and options when stock is unavailable. Flag any answers that remain verbal promises.

Take unresolved issues to a legal adviser before signing. If the supplier is not a party to the franchise agreement, make sure its commitments are recorded in a document that binds that supplier.

The bottom line: do not accept a mandatory supplier arrangement simply because it supports brand standards. Make sure you can calculate costs, check quality and rely on written procedures when supply problems arise.