Franchise suppliers: how to manage mandatory purchasing

A supplier that reliably serves your own outlet may not be ready to supply independent franchisees as well. Before expanding an existing business into a franchise network, look beyond the purchase price: check quality, lead times, liability for defects and alternative supply options. The aim is not to control every purchase, but to ensure that every member of the network can deliver the same promise to customers on reasonable, transparent terms.

1. Separate essential shared purchasing requirements from discretionary choices

Start with a list of the materials, products, equipment and services used by the existing business. For each item, ask: would a different choice genuinely compromise quality, safety or the distinctive character of the offering? Having bought something from the same supplier for years is not, in itself, a sufficient reason to make that purchase mandatory.

Divide the items into three groups:

• Mandatory products or sources: ingredients, specialist parts or other elements without which the business concept would not work in the same way.
• Approved suppliers: several providers that meet predefined quality and reliability criteria.
• Unrestricted local purchasing: products and services for which a basic specification is sufficient.

Record the commercial reason for each restriction. For a signature ingredient, this might be a consistent taste; for equipment, compatibility; and for packaging, product protection. A blanket requirement for franchisees to buy everything from you, without distinguishing between items, creates unnecessary dependency.

Also establish a process for proposing new suppliers. Specify the evidence required, who carries out the assessment, who pays for any testing and the deadline for providing a reasoned response to the applicant. This ensures that approval does not depend solely on the founder's personal judgement.

2. Check whether supply arrangements can support expansion

The benefits enjoyed by your existing business do not automatically extend to franchisees. A supplier may set a separate credit limit for each new business, require advance payment or apply different delivery charges. Before promising shared purchasing terms, obtain written confirmation of who they cover and under what conditions.

Decide who will act as the seller, too. Under a direct supply arrangement, the franchisee orders from the supplier and pays its invoice. If you buy the goods first and then resell them to the franchisee, you take on different contractual obligations, along with stock, payment and complaints-related risks. Acting as an intermediary also requires a clear agreement.

In particular, agree the following with the supplier:

• ordering procedures, minimum quantities and lead times;
• transport costs and terms for taking delivery;
• required quality standards and evidence of conformity;
• handling of defects, returns and recalls;
• notification of price changes or discontinued products.

Check the total cost for each outlet, not just the price per item. A larger minimum order may bring a lower price, but also more write-offs, cash tied up in stock and storage requirements. What suits a large company-owned outlet may be unsuitable for a smaller franchised unit.

3. Ensure purchasing restrictions comply with competition law

Slovenia has no dedicated law comprehensively governing franchise relationships. Nor is there a specific compulsory franchise register or a legally prescribed franchise disclosure document. This does not mean there are no rules: contractual relationships are governed by the Slovenian Obligations Code, including the principle of good faith and fair dealing, while restrictions on competition are governed by the Prevention of Restriction of Competition Act (ZPOmK-2).

Where an agreement may affect trade between EU Member States, Article 101 of the Treaty on the Functioning of the European Union is also relevant. Commission Regulation (EU) 2022/720 and its accompanying guidelines are relevant to the assessment of vertical agreements. The Regulation sets out the conditions for a block exemption; it is not a blanket authorisation for every restriction included in a franchise agreement.

Mandatory purchasing from a single source is not automatically prohibited, but its purpose, scope, duration and market context must be assessed. Before signing, have a lawyer specifically review long-term exclusive purchasing obligations and restrictions on the use of alternative sources.

Do not confuse purchasing discipline with setting resale prices. Setting fixed or minimum prices at which an independent franchisee sells to customers is generally a serious restriction of competition. Even a recommended price becomes problematic if you enforce it through pressure, penalties or incentives. The European Code of Ethics for Franchising is a self-regulatory framework, not legislation or a substitute for this assessment.

4. Establish transparency and alternative supply arrangements in advance

Explain to franchisees whether you receive a margin, commission, volume rebate or other benefit from mandatory purchasing. State clearly in the contractual documents whether you retain that benefit, share it or use it for collective purposes. In particular, explain the conditions attached to benefits that depend on the network's total order volume; do not present them as guaranteed savings.

Next, prepare a contingency plan for disruption at a key supplier. Identify a substitute product, the criteria for its suitability, the person responsible for approval and how outlets will be notified. Establish a temporary exemption for emergencies and specify how long it may last. The contract should set out the framework for obligations and changes, while operating instructions should detail the practical steps for ordering and checking quality.

Before your first franchisee joins, place a trial order for the intended location. Check delivery, documentation, the actual cost and the complaints procedure. Do not assume that successful delivery to your own address proves reliability everywhere.

Practical takeaway: prepare a purchasing matrix listing each product, its permitted source, the reason for any restriction, the total cost and the fallback option. Then cross-check it against supplier agreements and the franchise agreement. Resolve any inconsistencies before promising the network a reliable supply.