Franchising an Existing Business: A Guide to Mandatory Sourcing and Ordering Rules
Are you simply imposing your company-owned outlets’ purchasing practices on franchisees? This guide explains how to design sourcing requirements, ordering rules and stock shortage procedures that balance consistent quality with franchisee independence in Japan.
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When turning an existing business into a franchise, purchasing arrangements are easy to overlook. Bulk buying and ordering instructions that worked well for company-owned outlets can create stock burdens and cash-flow problems for independent franchisees. To build a healthy franchise community, you need to establish not only what must be standardised, but also who decides quantities and bears any losses—before recruitment begins.
1. Limit mandatory sourcing to what the brand needs
Start by listing the products, ingredients, consumables and equipment used in your company-owned outlets. Then assess whether each item needs to come from a specified source, rather than assuming that existing suppliers must be retained. It is important to distinguish between making administration easier for the franchisor and maintaining the quality delivered to customers.
Use the following three categories as a guide:
- Items that must be purchased from the franchisor or a designated supplier: items such as ingredients made to a proprietary recipe, where alternatives would struggle to reproduce the quality central to the brand.
- Items that may be sourced freely if they meet specifications: items whose quality can be verified against objective criteria such as material, dimensions and safety.
- Items that franchisees may purchase freely: items such as standard office supplies, where the choice of supplier has little effect on the customer experience.
For each item, record the reason for the sourcing requirement, quality standards, whether substitutes are permitted and who is responsible for reviewing the requirement. ‘Our company-owned outlets use it’ is not necessarily a sufficient reason. A proprietary sauce and ordinary cleaning products, for example, require different reasons and levels of standardisation.
If substitutes are allowed, also define the application documents, trial procedure, assessment criteria and expected response time. Providing an approval contact but never responding leaves franchisees with no meaningful discretion over sourcing.
2. Review whether restrictions are necessary under Japan’s Antimonopoly Act
Japan has no single comprehensive law governing all franchises, nor a general franchisor registration scheme. That does not mean the sector is unregulated. Contractual relationships are subject to legislation including the Civil Code, while transactions between franchisors and independent franchisees are subject to the Antimonopoly Act.
The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act identify conduct that may raise concerns during recruitment and in dealings after a contract is signed. They are based on the principle that franchisees are businesses independent of the franchisor. These guidelines are not legislation in themselves; they explain the approach to applying the Antimonopoly Act.
Mandatory sourcing is not automatically unlawful. However, restricting suppliers beyond what is necessary to maintain consistent quality, or using a superior bargaining position to make franchisees buy unnecessary products, may raise issues under the Act. A franchisee’s signature agreeing to the contract does not, by itself, resolve those concerns.
Franchisors should assess the purpose of each restriction, whether alternatives are available and the disadvantages for franchisees together. Where designated suppliers are combined with minimum purchase quantities, specified equipment and mandatory replacement during refurbishments, the overall burden needs to be examined.
Restrictions on the resale prices of goods supplied by the franchisor also require consideration under the Antimonopoly Act. Distinguish between recommending prices and enforcing them by penalising franchisees that offer discounts. It is important to have a specialist review both the specific contract and how instructions are given in practice.
3. Plan for stock losses, not just purchase prices
A franchisee’s costs are not determined by unit prices alone. Review delivery charges, surcharges for small deliveries, minimum order quantities, storage space, waste and payment timing. Small franchisees may not be able to access the bulk-buying terms available to company-owned outlets.
A schedule of trading terms for each item should include at least the following:
| Item | What to establish |
|---|---|
| Pricing | Applicable prices, treatment of tax and delivery charges, and how price changes will be notified |
| Ordering | Minimum quantities, order deadlines, lead times and cancellation cut-offs |
| Goods inspection | How and when to report shortages or damage |
| Returns | Eligible grounds, return delivery costs, and arrangements for refunds or replacements |
| Stock | Responsibility for unsold, expired or discontinued stock |
| Payment | Billing cut-off dates, payment dates and a contact for invoice queries |
New product launches and purchases of promotional goods need particular care. The franchisor’s sales plan will not necessarily match a franchisee’s demand forecast. Even where the franchisor proposes an initial order quantity, make clear whether it is recommended or compulsory, and whether it can be adjusted.
For price changes, do more than state that ‘the franchisor may change prices’. Set out the reasons for changes, the notice period and how existing orders will be treated. Even when the franchisor’s own purchasing costs rise, the process must allow franchisees to adjust their sales plans and cash flow.
4. Give franchisees control points in automated ordering and shortage procedures
Automated ordering based on sales data is useful, but it may not fully account for local events, weather or temporary closures. The system should not simply turn forecast quantities into mandatory purchases for franchisees.
Separate the ordering process into four stages: calculating recommended quantities, franchisee review and adjustment, order confirmation, and transmission to the supplier. If orders are confirmed automatically, explain in advance when this applies, how long franchisees have to make changes, how to suspend the process and what happens when the person responsible is absent. If the franchisor changes quantities, keep a record of who made the change, when and why.
Mandatory sourcing also requires a plan for supply interruptions. Agree on alternative suppliers, who will check quality, the temporary approval procedure and responsibility for additional delivery charges. Do not use substitutes whose safety cannot be verified simply to maintain sales.
For example, if a delivery of a specified ingredient is delayed, ‘wait for head office approval’ gives outlet staff little basis for action. Confusion can be reduced by deciding in advance whether approved substitutes may be used, whether sales of some products should be suspended and who will prepare customer notices.
5. Align the contract with ordering practices before recruitment
Once purchasing terms are settled, cross-check the franchise agreement, trading terms, recruitment materials and ordering screens. Do not allow a gap between the paperwork and actual practice—for example, where a contract permits free sourcing but franchisees receive lower assessment ratings for using products from other suppliers.
Article 11 of Japan’s Act on the Promotion of Small and Medium-sized Retail Business requires franchisors operating a ‘specified chain business’ as defined by the Act to provide prospective franchisees with written pre-contract disclosures and an explanation. Whether a business falls within this category is not determined simply by calling it a retail or food-service operation. The assessment depends on criteria including whether its franchisees are primarily small and medium-sized retailers; whether standardised contracts provide for ongoing product supply or supply arrangements and management guidance; the use of trade names or other branding; and the collection of payments on joining.
Where the Act applies, disclosures about matters such as the terms on which goods are sold must comply with the legislation. Even where it does not apply, important terms affecting a prospective franchisee’s decision—such as mandatory sourcing and minimum purchase quantities—should be provided in writing and explained in advance.
Before recruitment begins, test the procedures using scenarios involving not only routine orders but also returns, price increases, shortages and excess stock. Assign a responsible person and a deadline to any unresolved issue.
Practical takeaway: Start by summarising three points for your main items on a single sheet: why sourcing is restricted, who decides the quantities and who bears the losses. Purchasing arrangements that clearly explain these three points help sustain trust across the franchise community.
