Franchising: checking stock and purchasing obligations

Before joining a franchise network that sells products, you need to understand more than the initial franchise fee and royalties. Stock can tie up cash before you even open, while restocking obligations may continue even when sales slow down. This guide helps you check one specific issue: how much stock you will have to buy, on what terms and with what options for returning it.

1. Map out all purchasing commitments

Ask for a written breakdown of the supply process, from the initial stock order to subsequent replenishment orders. The crucial question is not simply ‘how much does the stock cost?’, but ‘what will I be obliged to buy, even if I make no sales?’.

Distinguish at least the following items:

• Initial stock: quantities, product mix, price and scope to adapt the selection to the local market.
• Regular minimum orders: the amounts or quantities you must buy each month, quarter or season.
• Automatic replenishment: shipments triggered by the management system or decided by the franchisor, including any right to refuse them.
• Launches and campaigns: promotional products, new collections or display units that require additional purchases.
• Additional costs: transport, insurance, storage, returns handling and disposal.

Also check who issues the invoices: the franchisor, a related company or external suppliers. Different terms may mean different payment deadlines, dispute procedures and responsibilities.

A sales forecast does not necessarily amount to a contractual obligation. Ask for a clear distinction between recommended targets, thresholds for obtaining discounts and genuinely binding purchasing commitments.

2. Use pre-contractual documents to check stock commitments

In Italy, franchising is governed by Law No. 129 of 6 May 2004. The agreement must be in writing, otherwise it is void. Article 3 requires, among other things, an express statement of the investment and any entry fees the franchisee must pay before starting the business.

If the initial stock order is compulsory, check that its financial impact can be established from the contractual documents. Do not settle for a general shop-fitting estimate that excludes stock.

Article 4 requires a complete copy of the agreement, together with the annexes required by law, to be provided at least thirty days before signing. Limited exceptions apply for specific confidentiality needs, with any omitted annexes identified. Use this period to compare the agreement with price lists, supply terms and sales presentations.

Article 6 also requires loyalty, fair dealing and good faith during pre-contractual dealings. The franchisor must promptly provide information that the prospective franchisee considers necessary or useful, except where it is objectively confidential or disclosure would infringe third-party rights, and must explain any refusal to disclose it.

Ask in writing how price list updates, minimum orders and returns work. The law does not provide a general right to return unsold stock: you need to check whether the agreement offers this protection and, if possible, negotiate it.

3. Turn your stock commitments into a cash flow plan

An attractive trading margin does not guarantee cash will be available. You may have to pay the supplier before selling the products, or order a new collection while the previous one is still sitting in your stockroom.

Work with your accountant to prepare a monthly forecast that separates:

• payments for purchases, including the VAT you need to fund;
• expected receipts and when they will arrive;
• stock remaining on hand;
• discounts needed to sell slow-moving products;
• any credit notes and the timing of refunds.

Also prepare a cautious scenario: sales below expectations, unchanged compulsory replenishment orders and delayed receipts. The aim is not to predict the future precisely, but to understand whether your cash reserve covers the commitments you have already made.

Ask for figures from outlets comparable in size, location and length of time in operation. An average across the entire franchise network can conceal significant differences. If figures are not provided, record that gap in your assessment rather than filling it with optimistic assumptions.

4. Negotiate returns, changes to the product range and exit terms

The word ‘returns’ alone tells you very little. A useful clause should specify which products are accepted, the deadline for returning them, their required condition and who pays the costs. Above all, check whether you will receive cash or a credit note that can only be used for new purchases.

Also clarify what happens if the franchisor discontinues a line, changes the outlet format or imposes a new product range. Can you still sell the old stock? Is there provision for replacement, take-back or contributions towards promotions?

Ask whether there is an obligation to buy back unsold stock when the relationship ends, and how the price is determined. Do not assume that the amount offered will match the original cost. Have your lawyer review any period allowed for selling remaining stock after the trade mark licence expires.

In practice: before signing, bring together all compulsory purchases, payment deadlines and rules on unsold stock in a single schedule. If a promise about returns or buy-backs is critical to the viability of the business, ask for it to be turned into a clear contractual clause.