Franchising: checking supplies, stock and unsold goods

Before joining a retail franchise network, you need to know more than the entry fee: you must understand which products you will have to buy, from whom and on what terms. A compulsory product range or unclear arrangements for unsold goods can tie up funds even when the shop is making sales. Checking supply arrangements helps distinguish a sustainable investment from a stockholding you may struggle to finance.

1. Identify who supplies the goods and who is responsible for problems

Start by checking how the relationship is structured. Does the franchisor sell products directly, or nominate suppliers with whom the franchisee signs separate agreements? In the latter case, the franchisor’s delivery promises do not necessarily match the supplier’s contractual obligations.

Ask for a written outline of the supply arrangements explaining:

• which products must be bought from the franchisor or designated suppliers;
• which purchases can be made freely;
• how an alternative supplier is approved;
• who receives orders, issues invoices and handles complaints;
• what happens when a compulsory item is unavailable.

An obligation to buy is not a guarantee of delivery. Check which delivery times are indicative and which are contractually binding, whether essential products will be available, and what procedure applies if supplies are interrupted. If the shop cannot sell alternatives, a delay could disrupt the business without leaving the franchisee an approved workaround.

When comparing franchise brands, also assess how heavily each model relies on a single supplier and how easy it is to replace an unavailable product.

2. Calculate the cost of the compulsory product range

The price list does not tell you the full cost of the goods. Ask for complete examples of an initial order and a replenishment order, including quantities, minimum pack sizes, delivery charges, any surcharges and payment terms.

Distinguish between at least three commitments: the stock needed to open, recurring minimum orders and purchases linked to new product launches. A reasonable initial range can become expensive if every new product must be purchased automatically, regardless of local sales.

Also check whether the minimum is expressed as an order value, a number of units or a quantity per individual product line. These are different requirements: being free to choose items within a minimum spend is not the same as having to buy every available variant.

Work with your accountant to prepare a forecast based on how long stock will take to sell, not just the theoretical margin. For each product group, record:

• the total purchase and delivery cost;
• the supplier’s payment deadline;
• the expected time before sale;
• any perishability or seasonality;
• the potential loss if the goods remain unsold.

Also ask how price lists can change, how much notice must be given and which price applies to orders already confirmed. The terms should be clear before you commit, rather than something you have to piece together from the first invoices.

3. Distinguish between returns, defects and unsold stock

The word “return” can cover very different situations. Raising a complaint about an incomplete delivery or defective products is not the same as returning undamaged items that have failed to sell.

Do not assume that the franchisor will buy back unsold stock. When buying as a business, you should not assume you have the cancellation rights available to consumers in certain circumstances. Check the applicable contracts to establish how stock left in the shop will be handled.

If a commercial returns arrangement is promised, ask for written details of:

• which products are eligible and which are excluded;
• deadlines for requesting and dispatching returns;
• packaging and storage requirements;
• any quantity limits or deductions;
• transport costs;
• whether you will receive a cash refund or a credit note.

A credit note that can only be used for new purchases does not release funds in the same way as a refund. Also check how superseded collections, products nearing their expiry date and stock remaining at the end of the franchise relationship will be treated. If goods are supplied on consignment, clarify ownership, responsibility for safekeeping, the risk of damage and when the obligation to pay arises.

4. Include supply agreements in the legal review

In Italy, franchising is governed by Law No. 129 of 6 May 2004. The contract must be in writing or it is void. Article 3 requires it to state, among other things, the amount of investment and any entry fees the franchisee must pay before starting the business.

Article 4 requires a complete copy of the proposed contract, together with the prescribed annexes, to be provided at least thirty days before signing. Use this period to compare the financial commitments arising from supply arrangements with your opening plan.

The law does not establish a general right to return unsold stock. Purchases of goods are also subject to the relevant provisions of the Italian Civil Code governing sales or ongoing supply contracts, as well as the terms actually agreed.

Ask your lawyer to review the franchise agreement, suppliers’ terms and returns agreements together, checking for any inconsistencies. A commercial assurance should not be left separate from the document governing the purchase.

Practical tip: before signing, trace an order from payment through to any eventual return. If compulsory quantities, responsibilities or arrangements for recovering value from unsold stock remain unclear, ask for written clarification before committing.