Buying a franchise: check your mandatory purchasing obligations

A franchise may look attractive because of its collective purchasing arrangements. But having to order from designated suppliers does not automatically mean getting a good deal. Your profitability also depends on delivery charges, minimum orders, stockholding requirements and arrangements for supply problems. Within a franchise network, collective purchasing helps maintain quality and brand consistency. Before buying a franchise, investigate what obligations these arrangements place on your own business.

1. Map out all your purchasing obligations

Ask not only for a supplier list, but also for the provisions that restrict your freedom of choice. These may be spread across the franchise agreement, its appendices, the operations manual and separate terms of supply.

For each product category, establish whether you must order exclusively from the franchisor, buy from a designated supplier or may propose a supplier yourself. Distinguish products specific to the franchise brand from general supplies, such as cleaning products and packaging. Ask why each requirement applies and how an alternative can be approved.

Also check:

• Minimum purchases: must you buy a minimum quantity, spend a minimum amount or source a specified proportion of your total purchases through the arrangement?
• Mandatory range: must you stock every product, even if some sell poorly locally?
• Ordering schedules: are there fixed ordering windows or compulsory advance orders?
• Stock: who bears the risk of spoilage, damage or unsold goods?
• Changes: who can change suppliers or product ranges, and how much notice must they give?

Record which party imposes each obligation. An agreement with the franchisor does not automatically bind an independent supplier.

2. Calculate the true cost of purchasing

A price list tells only part of the story. Compare a representative basket of products based on the total cost of getting them to your premises ready for sale. Include transport, packaging, order surcharges, storage and expected wastage.

Ask which discounts appear directly on your invoice and which are paid later as rebates. Check whether a discount depends on your own purchases or the network’s combined order volume. An anticipated rebate is not a guaranteed reduction in your costs.

Also ask whether the franchisor receives purchasing rebates or other payments from suppliers, and what arrangements govern these. Do not assume you are automatically entitled to have these payments passed on to you: have your rights and the relevant disclosure obligations assessed.

Then ask your accountant to model at least two scenarios: expected sales, and lower sales with minimum order requirements still in place. This will reveal whether apparently favourable purchase prices could actually leave you with costly surplus stock. Only compare alternatives offering comparable quality, service and terms of supply.

3. Make effective use of Dutch franchise rules

The Netherlands has a Franchise Act (Wet franchise), incorporated into Articles 7:911 to 7:922 of the Dutch Civil Code. Before you enter into an agreement, the franchisor must provide, among other things, the draft agreement and its appendices, along with details of required financial contributions and investments. The disclosure obligation also covers other information that the franchisor knows, or should reasonably suspect, is relevant to your decision.

Specifically request an explanation of mandatory purchasing costs, surcharges and purchase commitments. Have any unclear amounts or calculation methods clarified in writing. The information required by law must be provided at least four weeks before the franchise agreement is concluded.

The Franchise Act does not give you a general right to order freely from any supplier. Competition law also applies, including Article 6 of the Dutch Competition Act (Mededingingswet) and, where applicable, European competition rules. An exclusive purchasing arrangement is neither automatically prohibited nor automatically permitted. Ask a specialist to assess factors including its duration, scope, necessity for the franchise system and market conditions.

4. Agree what happens when supply goes wrong

A purchasing obligation creates a vulnerability if the designated supplier cannot deliver on time. Ask who you should contact in the event of shortages, quality problems or a product recall. Check whether the terms of supply contain specific commitments on delivery times, complaints and substitute products.

Discuss a written contingency procedure. When may you temporarily source goods elsewhere? Who grants permission, how quickly must they respond and which quality standards still apply? Without such an agreement, a practical emergency solution could conflict with your franchise obligations.

Also check what happens to stock you were required to hold when the product range changes or the franchise relationship ends. Is there a buy-back arrangement, who pays for transport and which products are excluded? Do not take buy-back for granted.

Practical conclusion: only sign once you know, for each mandatory product category, where you must order, what the total costs are and what arrangements apply to shortages or unsaleable stock. Put crucial exceptions in writing with the party that can actually honour them.