Buying a franchise: how to check mandatory purchasing requirements and margins

Joining a franchise network often means having to buy from specified suppliers. Centralised purchasing can ensure quality and reliability, but an affordable initial franchise fee does not necessarily mean the business will be sustainable. Before buying a franchise in Slovenia, check how much you will actually retain after all purchasing costs, and who can change those costs later.

1. Establish what you must buy and from whom

Do not stop at asking whether purchasing requirements are mandatory. Request a list of all products and services for which the franchisor specifies the supplier, specifications or approval process. Alongside goods for resale, this may include packaging, cleaning products, uniforms, equipment, software support and marketing materials.

For each item, clarify whether you must buy directly from the franchisor, an associated company or an independent approved supplier. Also check whether you can propose a local supplier that meets the same standards, and who pays for assessing that supplier.

Ask for documents, not just verbal explanations:

• current price lists and general purchasing terms;
• minimum quantities and minimum order values;
• rules on delivery, claims and returns;
• payment terms, advance payments and any required security;
• a list of mandatory opening stock and equipment.

Compare the agreement with the operations manual. If the agreement allows the franchisor to expand the range of mandatory products by changing the manual, this could create a new financial obligation without your signing anything further. Agree which changes require advance notice and which require your consent.

2. Calculate your margin using the actual purchase cost

The catalogue price is not necessarily the final cost of the goods. Add transport, storage, mandatory packaging, any import duties, costs of claims that you must bear, and expected write-offs due to damage or expiry. If you buy in another currency, also assess exchange rate risk.

Compare figures on the same tax basis. If you are entitled to recover input VAT, you should generally analyse margins excluding recoverable VAT; when planning actual cash flow, however, take the timing of tax payments into account. Ask an accountant to check the details relevant to your business.

Gross margin as a percentage is the difference between sales revenue and the cost of goods sold, divided by sales revenue. It is not the same as mark-up, which is calculated against the purchase cost.

Then deduct other variable costs from the gross profit: turnover-based franchise royalties, marketing contributions, card processing fees and sales platform charges. Only then can you see how much remains for rent, labour, finance costs and your own earnings.

Test the franchisor’s estimate against a basket of products expected to represent typical sales at your outlet. Do not rely solely on a best-selling, high-margin product. Ask for an explanation of the sales mix and allow for discounts, seasonality and stock losses.

3. Stress-test price rises, excess stock and supply disruptions

Prepare a base-case plan and a less favourable scenario. In the latter, assume higher purchase prices, slower sales and longer delivery lead times. Base your assumptions on actual price lists, delivery history and comparable outlets, rather than general promises of profitability.

Pay particular attention to stock financing. Sales that look profitable on paper will not prevent a cash-flow problem if you have to pay for goods upfront but sell them over several months. Calculate how much cash will be tied up in opening stock and how much additional working capital you will need when placing your next order.

Talk to existing franchisees about their practical experience:

• How often do price lists change?
• Does the supplier deliver orders in full and on time?
• Who bears the cost of mandatory promotional discounts?
• What happens to stock when the product range or brand identity changes?

Also ask whether the franchisor receives rebates or other payments from suppliers, and whether any of those savings are passed on to franchise outlets. Such payments do not in themselves indicate wrongdoing, but it is important to understand their implications for your costs.

4. Have purchasing rules legally reviewed and put them in writing

Slovenia has no specific franchising act, legally prescribed standard pre-contractual disclosure document or dedicated compulsory franchise register. This does not mean that negotiations and agreements are outside the scope of the law.

The Slovenian Obligations Code (OZ) is important, particularly its principle of good faith and fair dealing and its rules on negotiations, contract formation, performance and liability. The absence of a prescribed disclosure form is not permission to make misleading statements. Keep the offers, price lists, calculations and written answers on which you base your decision.

Purchasing and resale price restrictions are also subject to the Prevention of Restriction of Competition Act (ZPOmK-2) and, where the conditions for their application are met, EU competition rules, including Commission Regulation (EU) 2022/720 on vertical agreements. Mandatory purchasing is not automatically prohibited, but its scope, duration and effects need to be assessed. Setting fixed or minimum resale prices is particularly problematic.

The European Code of Ethics for Franchising is a self-regulatory framework, not Slovenian law. Check whether the franchisor has committed to complying with it and how that commitment is reflected in the agreement.

Before signing, negotiate advance notice of price rises, alternative sourcing during supply disruptions, the treatment of unsaleable stock and the consequences of material changes to purchasing terms. These rights should not be taken for granted: specify the circumstances that trigger them, the relevant time limits and the dispute resolution process, and have a legal adviser review the wording.

Practical takeaway: before paying the initial franchise fee, obtain the purchasing terms, calculate your actual margin and check how you will finance stock. Join the franchise network only once you also understand the costs that arise after opening.