Buying a franchise: check the mandatory suppliers

An attractive franchise offer can become considerably less appealing once you check who you must buy goods, raw materials and consumables from. Collective purchasing within a franchise network can ensure consistent quality and simplify operations, but it does not in itself guarantee competitive prices or timely deliveries. Before buying a franchise, therefore, review the entire purchasing arrangement, not just the initial stock package.

1. Establish exactly what you must buy and from whom

Ask the franchisor for a list of mandatory purchases. It should distinguish between products you must buy directly from the franchisor, products you must buy from specified suppliers, and products for which you may choose your own supplier, provided quality requirements are met.

The distinction between a mandatory product and a mandatory supplier matters. A requirement for packaging made from particular materials does not necessarily mean you may order it from only one company. Equally, a supplier’s approval does not tell you whether you may buy its entire product range.

For each purchasing category, record:

• who the seller is and whom you pay;
• which technical or quality requirements apply;
• whether there is a minimum order quantity or a required ordering frequency;
• who may change the list of permitted products or suppliers;
• whether you can propose a local supplier and what procedure applies.

These obligations should be set out in the contract or in a schedule clearly incorporated into it. A verbal explanation that purchasing is “generally collective” is not enough to calculate costs and plan stock levels.

2. Compare the total purchasing cost, not just the price list

Obtain a current price list and a sample order cost breakdown for a representative basket of products. Add delivery, handling charges, mandatory packaging and any other extras to the price. For supplies from outside the European Union, also check any customs duties and import obligations.

Compare like with like: the same quality, quantity, delivery terms and tax treatment. Work with an accountant to distinguish actual costs from the temporary cash-flow impact of VAT. Do not use a cheaper product that fails to meet the franchise system’s requirements as a direct comparison, although it may provide grounds for questioning whether those requirements are justified.

Ask specifically about rebates and other benefits. Does your outlet receive the volume discount, does the franchisor, or do both? Does the supplier pay the franchisor a commission? Such payments do not in themselves indicate wrongdoing, but it is important to understand the commercial incentives behind the choice of supplier. Do not assume these benefits will be shared unless this has been agreed.

Also check how prices may be changed. Ask for a clear notification procedure and confirmation of which price applies to an order that has already been accepted. Then calculate how an increase in the cost of key materials would affect the margin between revenue and direct costs. Do not assume you can pass every price increase on to customers.

3. Limit the risk of excess stock and supply disruptions

Minimum orders can cause problems even when purchase prices are competitive. You must pay for and store the goods before selling them. For products with a limited shelf life, unsold stock can mean a direct loss.

Ask for an explanation of the quantities in your initial order. They should be based on your outlet’s expected level of business, delivery lead times and necessary safety stock, rather than simply a standard package for every location. Check whether smaller, more frequent deliveries are possible, and whether slow-selling products can be returned or exchanged.

The contract should also clarify who bears the cost of stock that can no longer be used following a change to the mandatory product range or packaging. Do not assume you have an automatic right to have it bought back.

Dependence on a sole supplier is another risk. Agree the following in advance:

• the deadline for notifying you of delays or shortages;
• the procedure for approving an alternative product or supplier;
• the person responsible for urgent approvals;
• the rules on additional costs for alternative supplies;
• the procedure for complaints, returns and replacement of non-compliant goods.

If you enter into a supply contract directly with the supplier, check that it is consistent with the franchise agreement. A franchisor’s promise of prompt delivery does not, in itself, bind another company.

4. Have purchasing restrictions reviewed by a lawyer

Slovenia has no dedicated franchising law, and franchise agreements are not specifically regulated as a distinct type of contract. Contractual relationships are governed primarily by the Obligations Code (Obligacijski zakonik, OZ), including the principle of good faith and fair dealing and the rules on fulfilling obligations. There is no specific mandatory franchise disclosure document or general requirement to register a franchise offering.

This does not mean that all purchasing restrictions are permitted. The Prevention of Restriction of Competition Act (Zakon o preprečevanju omejevanja konkurence, ZPOmK-2) and, where applicable, European Union competition law are relevant. For vertical agreements, Commission Regulation (EU) 2022/720 on block exemptions is also important.

Mandatory purchasing is not automatically unlawful, but whether it is permissible depends on the terms of the arrangement and the circumstances. In particular, show a lawyer the provisions on exclusive purchasing, its duration, restrictions on alternative suppliers and the scope for unilateral changes. A general statement that a restriction ensures quality is no substitute for legal review.

Practical takeaway: before signing, prepare a single spreadsheet covering mandatory purchases, total costs and backup supply options. If you do not know the price, ordering rules and contingency arrangements for a key product, the purchasing element of the offer is not yet sufficiently clear.