Buying a NZ Franchise: Check Approved Supplier Rules

Buying a franchise can mean buying into a supply system as well as a brand. Required purchases may cover ingredients, packaging, cleaning products or essential services. Within the franchising community, these arrangements can protect consistency and quality, but they also affect your margins and flexibility. Before committing, establish what you must buy, who sets the price and what happens when supplies fail.

1. Map the purchasing restrictions

Ask for a complete list of compulsory suppliers and purchasing categories. Read it alongside the franchise agreement, relevant manual provisions and any separate supply contracts. An approved supplier list alone will not explain your obligations.

Distinguish between three arrangements: buying exclusively from one named supplier, choosing between approved suppliers, and buying elsewhere provided the product meets specified standards. Each gives you a different level of control.

Check whether the franchisor can change suppliers or introduce new compulsory purchases during your term. Ask whether restrictions apply to everyday services, such as payment processing or software, as well as physical goods.

Build a simple purchasing schedule recording:

• What must be purchased and from whom.
• Whether minimum orders or purchase volumes apply.
• Which document imposes each requirement.
• How prices and delivery charges are set.
• Whether alternative suppliers need written approval.

For an existing outlet, compare this schedule with recent supplier invoices. Differences may reveal exceptions that will not automatically continue when you take over.

2. Calculate the real cost of supply

A quoted unit price is only part of the cost. Request current price lists and sample invoices showing freight, handling charges, order surcharges and payment terms. Confirm whether quoted amounts include GST so your comparisons are consistent.

Ask your accountant to compare a representative basket of required purchases with credible alternatives of equivalent quality. The purpose is not to assume you can switch suppliers. It is to understand the financial effect of accepting the brand’s purchasing rules.

Consider waste and order size too. A lower unit price may offer little benefit if minimum quantities exceed what your outlet can use before products expire. Regional delivery costs and frequency may also make another franchisee’s experience a poor guide to your location.

Ask how frequently prices can change, what notice you receive and whether there is any contractual pricing formula. Do not treat a current price list as a promise that prices will remain unchanged.

Finally, ask whether the franchisor or an associated business receives supplier rebates, commissions or a margin on goods it resells. Establish whether these benefits are retained, shared or applied elsewhere. Do not assume collective buying automatically means savings flow directly to franchisees.

3. Test the supply failure arrangements

Exclusive sourcing creates dependence. Ask what happens if the nominated supplier cannot deliver, sends defective goods or stops trading.

Look for a practical alternative-supply process, including who approves substitutions and how quickly they must respond. A right to request permission is less useful if there is no clear route to an urgent decision.

Use a realistic scenario: an essential item is unavailable before a busy trading period. Can you buy an equivalent locally, reduce your offering or temporarily stop taking orders? Who authorises that response, and who bears the additional cost?

Read the supplier’s terms as well as the franchise agreement. Check delivery commitments, inspection deadlines, returns procedures and remedies for defective goods. Identify who actually contracts with the supplier: you, the franchisor or another purchasing entity.

If buying an existing outlet, obtain confirmation of the payment terms available to you. The seller’s credit account, discounts or informal delivery arrangements may not transfer. Deposits or payment before dispatch could materially change the cash needed to operate.

4. Understand your legal position before agreeing

New Zealand has no franchise-specific legislation, compulsory franchise registration or universal statutory franchise disclosure regime. General law applies, including contract law, the Fair Trading Act 1986 and the Commerce Act 1986.

The Fair Trading Act prohibits misleading or deceptive conduct and unsubstantiated representations. Claims about purchasing savings or supplier benefits should therefore be examined carefully. Ask for supporting evidence rather than relying on broad assurances about buying power.

The Commerce Act governs competition matters. Exclusive sourcing is not automatically unlawful, but arrangements raising competition concerns need specialist assessment. Do not assume a purchasing restriction is unenforceable simply because another supplier is cheaper.

For franchisors belonging to the Franchise Association of New Zealand, its Code of Practice imposes disclosure obligations. This is a membership-based framework, not legislation applying to every franchise. Request relevant supplier information expressly and have your lawyer identify which protections are actually in your contracts.

Practical takeaway: Before signing, assemble the purchasing rules, current costs and supply failure procedures in one file. Proceed only when you understand both the price of compulsory sourcing and the options available if it stops working.