Buying a franchise: check purchasing terms and margins

An established franchise brand and collective purchasing can be attractive. But a competitively priced product range does not automatically mean a healthy margin for your outlet. Within a franchise network, agreements should make clear who earns money from purchasing, who bears the risks and which decisions you can make yourself. Before signing, investigate not just the franchise fee, but above all the terms on which you must buy products and materials.

1. Map out all compulsory purchasing

Ask which products and services you must buy from the franchisor or designated suppliers. This may extend beyond the products you sell: think packaging, cleaning supplies, uniforms and till supplies. Minimum orders or compulsory starter packages can also restrict your freedom.

Read the franchise agreement alongside the operating manual, supplier terms and current price lists. A general reference to ‘the prescribed product range’ tells you too little about your day-to-day obligations.

For each product category, draw up a summary covering:

• the approved supplier and any alternatives;
• minimum purchase quantities and ordering frequency;
• the basis for pricing and any additional charges;
• payment terms and any security required;
• rules on returns, defects and unsold stock.

Also check who your contractual counterparty is. If you order through a central platform, the franchisor is not necessarily the legal supplier. That distinction matters if a delivery is incorrect, a supplier becomes insolvent or there is a dispute over a credit note.

Ask what happens if the designated supplier cannot deliver. Can you temporarily buy elsewhere, who grants permission and how quickly?

2. Calculate your margin using actual purchasing terms

Do not compare individual catalogue prices alone. Compare the full cost of a representative basket of products. Include both bestsellers and slow-moving items. Where possible, use recent, anonymised invoices from comparable outlets, with the consent of the business owners concerned.

Alongside the product price, factor in transport, order surcharges, packaging, stock losses and settlement discounts. Work consistently excluding VAT if your business can recover it in full. Ask your accountant to assess any different VAT treatment that may apply.

Then calculate gross profit: sales revenue minus the purchase cost of the products sold. Deduct the other directly related costs to see how much is actually left to contribute towards your fixed costs. Avoid counting the same costs twice.

Pay particular attention to the difference between guaranteed and conditional benefits. An annual rebate that only becomes payable once a certain purchase volume is reached is not a guaranteed discount on every order. Ask who receives the rebate, when it is calculated and whether any of it is passed on to you.

Also model the effect of a supplier price increase that you cannot immediately pass on to customers. This is not a sales forecast, but a targeted check of how sensitive your margin is to purchasing terms.

3. Ask for transparency about how the franchisor makes money

The Netherlands has specific franchise legislation: the Dutch Franchise Act has been incorporated into Title 16 of Book 7 of the Dutch Civil Code since 1 January 2021. Article 7:913 of the Code requires the franchisor, before the agreement is concluded, to provide information on matters including the fees, investments and other financial contributions required of you. Other information reasonably relevant to entering into the agreement must also be provided.

Ask in writing how the franchisor earns money from the supply of goods. Possible sources of income include mark-ups on supplies, payments from suppliers and rebates for collective purchasing. Such income is not automatically unreasonable, but it may be important when assessing the offer.

The law does not automatically entitle you to every confidential supplier agreement or to payment of all purchasing rebates. If anything is unclear, seek advice on which information falls within the statutory disclosure duty in your circumstances.

Article 7:916 of the Code also requires annual information on the extent to which the mark-ups or other financial contributions charged cover the costs or investments they are intended to fund. Agree in advance how this will be reported. A detailed breakdown is more useful than a simple statement that collective purchasing is ‘cost-effective’.

4. Agree stock and delivery risks in advance

An attractive purchase price can still prove costly if you have to order too much. Find out who decides on new-product packages, seasonal items and promotional stock. Ask whether national promotions involve compulsory purchases and who bears the cost if products remain unsold.

Ensure there are written terms covering damaged goods, shelf-life issues, product recalls and changes to the product range. Also check whether returns are refunded or only credited against future orders.

Discuss day-to-day operations with several existing franchisees. Do deliveries arrive on time? Are credit notes accurate? Are order quantities suitable for smaller outlets? Use their experiences to ask targeted follow-up questions, not as a substitute for contractual agreements.

Practical takeaway: only sign once you can explain the compulsory purchasing arrangements, your margin after additional costs and how stock risk is allocated. Have any missing terms put in writing, and seek independent advice on financial and legal uncertainties.