Turning an Existing Business into a Franchise: A Guide to Specifying Suppliers and Setting Purchasing Terms

When turning an existing business into a franchise, using the same suppliers across all outlets can make it easier to maintain consistent quality and operations. However, franchisees are businesses independent of the franchisor. Purchasing arrangements that suit head office are not necessarily reasonable for franchisees. To build trust across the franchise network, you should be ready to explain both why particular suppliers are required and the terms on which franchisees will buy from them before recruitment begins.

1. List the items subject to supplier requirements and assess why each restriction is needed

Start by drawing up a purchasing list covering products, ingredients, packaging, equipment and other supplies. For each item, record not only the current supplier but also the required specifications, delivery coverage, lead times, order quantities and the franchisor’s role. Check with suppliers too: terms offered to company-owned outlets may not extend to franchisees operating as separate legal entities.

Next, divide purchasing arrangements into three categories.

• Items that must be bought from a specified supplier: items such as ingredients made to a proprietary formula, where sourcing elsewhere could make it difficult to maintain the value offered to customers.
• Items that can be bought from several approved suppliers: items for which multiple suppliers meet common specifications.
• Items that franchisees can source freely: items such as general office supplies that are unlikely to affect brand consistency directly.

These are practical categories for assessing necessary restrictions, not legal classifications. Rather than imposing blanket requirements simply because you have a long-standing relationship with a supplier or find it easier to manage, consider whether specifying the product requirements would achieve the same aim.

For example, requiring a proprietary sauce and ordinary cleaning products to come from specified suppliers may not be justified on the same grounds. Recording the purpose of each restriction will help you explain it to prospective franchisees and provide a basis for removing restrictions or reviewing suppliers later.

2. Review the scope of restrictions under Japan’s Antimonopoly Act

Japan has no single comprehensive law governing all franchises, nor a general registration system for franchisors or franchisees. However, disclosure duties apply to certain businesses, and transactions between franchisors and franchisees are subject to the Antimonopoly Act. The Civil Code and other laws also affect contractual rights and obligations.

The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act do not treat specifying suppliers for products or ingredients as unlawful in itself. The key question is whether the restriction falls within what is necessary to operate the franchise properly, for example to protect trade secrets or maintain a consistent brand image.

Restrictions that go beyond this and unfairly disadvantage or constrain franchisees may, however, raise issues such as abuse of a superior bargaining position, tie-in sales or dealing on restrictive terms. A franchisee’s signature on the agreement does not, by itself, resolve these concerns.

Use the following questions in your review.

• Could the same objective be achieved through a less restrictive approach?
• Are the specified supplier’s products and trading terms reasonable in light of that objective?
• Are franchisees being required to buy unnecessary equipment or supplies alongside essential products?
• Could differences in location or outlet size create an excessive burden?

The assessment depends on the circumstances. Before introducing strict purchasing restrictions, or supplier requirements driven mainly by the franchisor’s revenue, consult a professional with expertise in Japan’s Antimonopoly Act.

3. Show the total purchasing cost, not just unit prices

Franchisees pay more than the price of the goods. Delivery charges, minimum order quantities, small-order surcharges and chilled or frozen transport costs can all affect purchasing costs, even at the same level of sales. Rather than simply handing over a price list, prepare a schedule of trading terms showing who pays whom, and what each payment covers.

At a minimum, the schedule should identify where orders are placed, who sells the goods, who issues invoices, how prices can be checked, delivery terms, payment deadlines and how price changes will be notified. Clearly distinguish between arrangements where the franchisor buys goods and resells them to franchisees and those where franchisees buy directly from suppliers.

Also decide how you will explain any arrangements under which the franchisor receives supplier rebates or sales incentives. You should not assume that every transaction is subject to identical detailed disclosure duties. However, if you state that discounts obtained through collective purchasing will be passed on to franchisees, that explanation must reflect how the money actually flows.

Model purchasing costs for small outlets and remote locations as well as a typical outlet. Goods previously delivered in bulk to company-owned operations may become more expensive when delivered separately to each franchisee. Before recruitment begins, check that your explanations to franchisees match the terms quoted by suppliers.

4. Establish alternative sourcing procedures that work during shortages

If a specified supplier becomes unable to deliver, a clause that merely prohibits purchases elsewhere leaves franchisees without a clear basis for keeping their business running. Supplier requirements and exception procedures should always be designed together.

Set out whom to contact about shortages, who is responsible for finding alternatives, how franchisees should apply for approval, the expected response time from head office and who has authority to make emergency decisions. When approving a substitute, record the items covered, the outlets permitted to use it, the approval period and the conditions for returning to normal purchasing arrangements. Make clear what happens if head office does not respond.

The quality of substitutes is not the only issue: you must also establish who pays additional delivery charges or higher emergency purchase costs. Before making franchisees responsible in every case, review the cause of the disruption, the supply commitments made by the franchisor and the contract with the supplier.

Provide a process for requesting changes during normal operations too. If a franchisee proposes a supplier capable of reliably providing equivalent products, having clear requirements for supporting documents, designated reviewers and a process for explaining refusals will reduce arbitrary decisions. Before launch, run a tabletop exercise covering shortages and delivery delays to check that those responsible can make the necessary decisions in practice.

5. Explain purchasing obligations before signing and keep records

Article 11 of Japan’s Act on the Promotion of Small and Medium-sized Retail Business requires franchisors whose operations qualify as a ‘specified chain business’ under the Act to provide written documents and explanations before a contract is signed. Trading terms for products, ingredients and similar items are an important part of the required disclosure.

Whether a business falls within the Act is not determined simply by describing it as ‘retail’ or ‘food service’. Assess the relevant criteria, including whether it primarily serves small and medium-sized retailers and, under standard-form contracts, provides ongoing supplies of goods or arranges sales, offers management guidance, permits the use of trade marks and collects payments on joining.

Even where the Act does not apply, it is important to explain in writing before signing any terms that impose particular obligations on franchisees, such as mandatory suppliers. Taking the Japan Fair Trade Commission’s guidelines into account, explain which items franchisees must purchase, what choices they have, how they can check prices and delivery terms, and how alternative sourcing works.

Do not simply assert that collective purchasing offers better terms: explain the assumptions behind that claim. Check costs against the prospective franchisee’s intended location and order volumes, and record questions and answers. Give supplier lists and schedules of trading terms version numbers and update dates, and retain the versions used when providing the explanation.

Practical takeaway: Start with a single purchasing overview that records, for each item, why a supplier is specified, the franchisee’s total cost and the alternative arrangements in the event of a shortage. If you cannot explain all three, review the terms before recruiting franchisees under a blanket supplier requirement.