Franchise procurement: how to set up supplies for franchisees

In an established business, procurement often relies on the owner’s personal arrangements: a supplier holds stock back, a driver makes an extra trip, or an account manager allows deferred payment. A new franchisee does not automatically enjoy these advantages. Before recruiting franchisees, you need to build a supply system that can be replicated. Its purpose is to deliver consistent results across locations without making procurement a source of unpredictable costs and operational disruption.

1. Categorise purchases by their importance to the product

Start not with a list of favourite suppliers, but with the items an outlet needs to deliver on its promise to customers. Export the existing business’s purchasing records for a period that captures seasonal patterns, and identify the purpose of each item.

Divide the items into three groups:

• Product-critical: signature ingredients, specialist consumables and equipment with specified characteristics. Substitutions may affect the end result or safety.
• Important for brand presentation: packaging, furniture and uniforms. Specifications matter here, but a particular manufacturer may not be essential.
• General-purpose: stationery, some cleaning and maintenance supplies, and other items for which a clear specification is sufficient.

For each group, decide how purchases should be made: through the franchisor, from approved suppliers, or independently against set requirements. Do not centralise every purchase simply for the management team’s convenience: shipping everyday goods from another region may wipe out any savings for the franchisee.

The output of this stage is a procurement matrix. It should include each item’s name, specifications, permitted alternatives, ordering procedure and the person responsible for approving substitutions. Replace phrases such as ‘a good-quality equivalent’ with measurable requirements: composition, dimensions, compatibility, shelf life or required documentation.

2. Check the terms available to an independent franchisee

The price available to your own outlet does not necessarily apply to a franchisee. A supplier may treat the franchisee as a new customer, require payment in advance or set a different minimum order quantity. Ask for terms for separately registered individual entrepreneurs and companies, rather than just a quotation for your own business.

Agree the following with the supplier:

• delivery coverage and schedules;
• minimum orders and whether mixed orders are allowed;
• production and order fulfilment lead times;
• payment terms, access to credit and procedures for price changes;
• procedures for shortages, defective goods and returns;
• conformity documentation where it is mandatory for the goods concerned.

Calculate the total cost of supply: purchase price, transport, unloading, storage, potential losses and cash tied up in stock. A bulk discount may offer poor value to a small outlet if the goods spoil before they can be sold.

Ask the supplier to explain how it will onboard a new franchisee: who will set up the customer account, take the first order and resolve any delays. A promise to ‘serve the whole network’ without verified logistics arrangements should not underpin the franchise’s financial model.

3. Distinguish franchise obligations from supply terms

In Russia, arrangements granting a package of exclusive rights are governed by Chapter 54 of the Civil Code of the Russian Federation, entitled ‘Commercial Concession’. This package includes the right to use a trade mark or service mark. Under Article 1028 of the Civil Code, the agreement must be in writing, and the grant of the right of use must be registered with Rospatent, Russia’s intellectual property authority. Without registration, the grant of that right is deemed not to have taken effect.

A commercial concession agreement does not, however, replace the terms governing the supply of goods. Supply arrangements are subject, among other provisions, to Section 3 of Chapter 30 of the Civil Code. The terms may be agreed in a separate contract or properly incorporated into a mixed contract. The documents must not contradict one another.

The contractual documents should explicitly state:

• who sells the goods and whom the franchisee pays;
• which purchasing requirements are mandatory;
• how alternative suppliers are approved;
• when the supply obligation is considered fulfilled;
• who handles claims and the deadlines for responding;
• how the product range and purchase prices may change.

If the management company merely recommends a supplier, do not imply that it guarantees every delivery. If it sells the goods itself, set out its obligations as the seller.

Mandatory purchasing from a specified party requires a separate legal assessment. Such restrictions may engage Article 1033 of the Civil Code and Federal Law No. 135-FZ ‘On the Protection of Competition’. Do not assume that every exclusive purchasing arrangement is automatically permissible: a lawyer needs to assess the specific terms and the market concerned.

4. Plan for disruption before the first outlet opens

For every critical item, identify a fallback: a second supplier, an approved substitute or a temporary reduction in the product range. Sometimes it is safer to suspend sales of a particular product than to allow an untested alternative.

Prepare a short disruption response guide. Specify when the franchisee must report a risk, who makes the decision, what supporting evidence is needed for a substitution and how long approval remains valid. Include a way to notify other outlets if the problem involves a shared supplier.

Calculate safety stock levels using actual consumption, demand fluctuations, delivery lead times and storage life. There is no single rule for every item. Large stocks of perishable goods can increase losses rather than prevent them.

Before onboarding franchisees, place a test order on the terms a future franchisee would receive. Check the entire process: ordering, payment, delivery, acceptance of the goods and handling a simulated claim. Then compare the estimated cost with the actual cost and update the procurement matrix.

Practical takeaway: before selling a franchise, prepare three connected tools: a procurement matrix, agreed supply terms and a disruption response plan. Franchisees need to know not only where to buy goods, but also what to do when their usual supply fails.