Mandatory purchasing in a franchise: what to check

Joining a franchise network usually means buying products, equipment or consumables from the franchisor or approved suppliers. This arrangement can simplify operations and maintain consistent quality, but it also affects your margin and independence. Before choosing a franchise brand in Spain, look beyond the initial joining costs and examine your purchasing obligations throughout the contract.

1. Identify what you must buy and from whom

Do not assume that ‘approved suppliers’ means you are free to choose. There may be a list of alternatives, a single authorised supplier or an obligation to buy directly from the franchisor. Each arrangement has different implications if prices rise or a delivery fails to arrive.

Ask for a written list of the categories covered by mandatory purchasing requirements. It should distinguish between goods for resale, raw materials, packaging, uniforms, machinery and other items needed to operate. Also check whether the obligation extends to future additions to the catalogue.

For each category, clarify:

• Who sells and invoices you: the franchisor, a related company or a third party.
• What freedom you have: to choose between suppliers, suggest alternatives or buy equivalent products.
• How an alternative is approved: the documents required, quality criteria and response deadline.
• Where the obligation is set out: in the contract, an appendix or the operations manual.

If the contract refers to a manual, ask to see the relevant financial obligations it contains and the rules for amending it. A general reference does not allow you to assess the scope of future changes.

2. Calculate your margin using actual orders, not the catalogue

A purchase price list alone does not show the full cost of supplies. Ask for properly anonymised examples of orders and invoices from comparable outlets. Then cross-check those terms with existing franchisees, respecting their confidentiality obligations.

Review delivery charges, surcharges, packaging, storage requirements, discounts and payment terms. Check whether incentives depend on meeting targets and when they are paid: a conditional discount should not be treated as a guaranteed saving.

Pay particular attention to three requirements:

• Minimum orders: these may force you to buy more than you need to secure a delivery.
• Minimum stock levels: these tie up cash and may lead to spoilage, expiry or obsolescence.
• Compulsory product ranges: these may include items with little demand in your location.

To assess a product’s margin, start with its selling price excluding VAT and subtract the purchase cost, attributable transport costs and expected losses. Then factor in any other relevant variable costs. Do not confuse the result with the outlet’s final profit.

Also ask what happens with promotions and product launches: who decides quantities, whether you can reduce them and whether unsold goods can be returned. Other outlets’ experience can help identify problems, but it is no substitute for a contractual commitment.

3. Negotiate terms for price rises and supply failures

Supply arrangements warrant a dedicated legal review. It is not enough for the supplier to be reliable today: you need to know what will happen if it changes its terms or stops supplying you.

Look for clear provisions covering:

• Prices: the procedure for updates, advance notice and the treatment of orders already accepted.
• Deliveries: timescales, receipt of goods and reporting shortages or defects.
• Problems: replacements, credits and responsibility for return costs.
• Supply shortages: the option to buy elsewhere, urgent approval and quality requirements.
• Product range changes: transition arrangements and the treatment of stock that can no longer be used.

Do not assume you will have the right to buy outside the network if a product is unavailable. Agree a procedure that allows you to keep trading without breaching the brand’s standards.

If the franchisor selects the supplier but is not the seller, establish who will be liable to you. A promise to act as an intermediary is not the same as accepting liability for delays or defects.

4. Understand the legal framework before accepting restrictions

In Spain, Article 62 of Law 7/1996 on Retail Trade and Royal Decree 201/2010 regulate aspects of franchising. Pre-contractual information must be provided in writing at least twenty working days before any franchise contract or preliminary agreement is signed, or any payment is made to the franchisor. Among other things, it must enable you to understand the obligations and financial commitments under the agreement.

This disclosure duty does not make every supply condition valid. Restrictions must also be assessed under competition law, including Law 15/2007 on the Defence of Competition and, where applicable, European rules on vertical agreements. Exclusive purchasing is neither automatically unlawful nor automatically permissible: its scope, duration and context matter.

The contract and general rules governing obligations and contracts also determine many of your rights. As a business operator, you should not assume you have the protections that apply to consumer purchases.

Practical takeaway: before signing, gather the contract, price lists and supply terms. If you cannot explain how much you will have to buy, how prices may change and what you will do if goods are unavailable, important terms still need to be resolved.