Franchise purchasing: how to assess mandatory suppliers

Mandatory purchasing requirements can have a greater impact on an outlet’s operations than the royalty rate. Raw materials, packaging, equipment and branded goods often have to come from approved suppliers. Consistent quality standards are a natural part of a franchise network, but prospective franchisees need to understand their cost in advance. Before paying for a franchise, check not only the list of suppliers but also the rules governing how you must order, accept delivery of and pay for products.

1. Establish exactly what you will have to buy

Ask the franchisor to divide purchases into three categories: items you must buy exclusively from a specified supplier, items you may buy from any supplier on an approved list, and items you may source independently provided they meet the required specifications. A clause stating that “all purchases must comply with network standards” is no substitute for this breakdown: it may conceal obligations that do not appear in the sales presentation.

Before signing the agreement, request:

• a list of mandatory goods, materials and equipment;
• current specifications and quality requirements;
• a supplier list identifying the legal entities involved;
• sample supply agreements and current price lists;
• delivery, payment, acceptance and returns terms;
• rules for changing the product range and approving equivalent alternatives.

Check who the seller is: the franchisor itself, an affiliated company or an independent supplier. This determines who you should direct claims to. If the supplier receives the payment, a franchise manager’s promise that “we’ll replace everything” does not, in itself, impose that obligation on the franchisor.

Examine the start-up package separately. Every item should have a clear purpose, quantity and specification. Ask which goods are essential for opening and which are proposed as reserve stock. Find out whether you can reduce the initial order to reflect your storage space, local demand and the products’ shelf life.

2. Check prices and the rules for changing them

Do not compare unit prices alone. The total purchasing cost includes delivery, unloading, mandatory packaging, storage and potential losses. Clarify whether VAT is included and which documents accompany each delivery. A uniform price list across the network does not necessarily mean that the cost of receiving goods is the same in every city.

Ask for a fully costed order for your planned outlet, using the required product range, delivery address and expected delivery frequency. This often reveals minimum order values, transport surcharges and requirements to buy slow-selling items alongside popular ones.

Pay particular attention to the following terms:

• Minimum order. Can different items be combined to meet the minimum, and how does pricing change for smaller orders?
• Advance payment. When does the obligation to dispatch the goods arise, and how quickly must payment be refunded if they are not supplied?
• Price changes. How many days’ notice must the supplier give, and is the price of a confirmed order protected?
• Discounts. Are the eligibility criteria set out in the contractual documents, rather than just in correspondence?
• Product range updates. Who bears the cost of leftover packaging or goods when standards change?

Do not settle for a promise that “prices will be in line with the market”. Without a comparison method and a set of comparable specifications, this is difficult to verify. Propose a clear procedure for giving notice, confirming orders and approving alternatives if prices rise substantially.

3. Agree what happens if deliveries are delayed or goods are defective

The key practical question is whether the outlet can keep operating if a mandatory supplier fails to dispatch goods. Obtain a written answer before buying the franchise. Ideally, there should be a backup supplier or a procedure for temporarily approving an equivalent alternative, with a fixed response deadline.

For example, the agreement could specify what evidence of a delay the franchisee must submit, which specifications the franchisor will check in a proposed alternative, and who makes the decision. Treating silence as approval on your own initiative is risky: if the parties want silence to have that effect, they should expressly agree it.

Check the delivery acceptance procedure. Who records damaged packaging, shortages, failures to maintain the required temperature or insufficient remaining shelf life? What photographs, inspection reports and batch details are needed to support a claim? Are there separate rules for hidden defects that cannot be detected during unloading?

Compare the consequences under both agreements. The supply agreement may allow a long wait for replacements, while the franchise agreement may require the full product range to be available at all times. The franchisee could therefore face a penalty for a breach caused by someone else’s delay. Discuss exemptions from penalties and how to document these circumstances. Do not assume that the supplier’s liability automatically covers the franchisor’s claims.

4. Record the agreed terms in line with Russian law

Russia has no separate franchising law. Chapter 54 of the Civil Code of the Russian Federation, on commercial concessions, applies to the grant of a bundle of exclusive rights that includes the right to use a trade mark. The agreement must be in writing, and the grant of the right to use that bundle must be registered with Rospatent, Russia’s intellectual property office. Supply agreements are governed, among other provisions, by Chapter 30 of the Civil Code. These documents should be reviewed together.

Russian legislation does not prescribe a specific mandatory form of pre-contractual franchise disclosure equivalent to the disclosure document required in some countries. You should therefore request purchasing lists, draft agreements and rules for changing standards yourself. Negotiations are subject to the general good-faith requirements of Article 434.1 of the Civil Code, but these do not replace detailed written terms.

A requirement to buy from approved suppliers cannot, in itself, be declared unlawful without further analysis. Restrictions should be assessed with a lawyer, taking into account the content of the agreements and applicable competition law requirements. Separately check any provisions allowing the franchisor to change suppliers, the product range or mandatory expenditure by unilaterally updating its internal rules.

Practical takeaway: before paying for a franchise, assemble a complete set of purchasing terms. These should clearly identify the mandatory product range, the total order cost, delivery times, replacement procedures and each party’s liability. Turn unresolved questions into contractual terms before signing, rather than trying to settle them after the first failed delivery.