Buying a franchise: review purchasing requirements and supplier terms

When you buy a franchise, you join a network where collective purchasing can deliver consistent quality and simplify day-to-day operations. At the same time, having to buy from specified suppliers can limit your flexibility. Before signing, you need to understand what you must buy, how prices are set and what happens if a delivery fails to arrive. Both profitability and your ability to keep trading are at stake.

1. Identify which purchases are actually mandatory

Ask for a consolidated list of the goods and services you must buy or hire. Do not look only at the franchise agreement: obligations may also appear in appendices, product range lists and separate supplier agreements. Check that the list applies to the franchise business you will be running, rather than simply being an example from another outlet.

Distinguish between three types of requirement:

• Specified supplier: you must buy from the franchisor or a named company.
• Approved supplier: you have a choice, but only among suppliers approved by the network.
• Specified standard: you may choose your supplier as long as the product meets documented quality requirements.

The distinction matters. A requirement for a particular level of quality does not necessarily mean that only one company may supply the product, but the agreement may impose both restrictions.

Also ask whether the requirement covers everything you need or only a core range. Are there minimum orders, mandatory promotional packages or requirements to stock slow-selling products? Include consumables, workwear, cleaning services and hired equipment in your review. Small, recurring purchases can add up to a substantial cost.

2. Calculate the full cost of getting products ready for sale

A price list does not always show your true purchasing cost. Ask for current delivery and payment terms, along with an example of a complete supplier invoice. Check which prices apply to your particular outlet and whether any introductory discounts are time-limited.

Then prepare a costing for a representative selection of products or services. Include whichever of the following are relevant to the franchise:

• the purchase price after discounts that actually benefit you,
• freight, handling fees and small-order surcharges,
• wastage, shelf life and return costs,
• stockholding costs and capital tied up before a sale,
• payment terms and any advance payment requirements.

Compare like-for-like alternatives, rather than simply looking for the lowest unit price. A more expensive supplier may offer more reliable deliveries or better quality, but those benefits need to be clearly explained and assessed.

Ask who receives volume discounts, rebates or other payments from the supplier. Do not assume that the network's purchasing volume automatically passes the full saving on to you. Ask how these payments affect your price and what information you will receive to check how they have been calculated and allocated.

Also examine how purchase prices may be changed and how much notice you will receive. Test the effect of a price increase on your gross margin if your selling price and sales volume remain unchanged. The aim is to understand your exposure, not to predict the next price change.

3. Put workable arrangements in place for supply problems

An obligation to buy is not the same as a commitment to supply. If you must buy everything from a particular supplier, you need to check what that supplier actually promises in return.

Who is your contractual counterparty for the purchase? The franchisor may have negotiated the terms without being the seller or accepting responsibility for delays. Read the supplier agreement alongside the franchise agreement and check how responsibility and claims for faulty goods or delivery problems are handled across the two.

Ask for clear answers on delivery times, back orders, faulty goods and who pays return freight. For fresh goods or seasonal products, the remaining shelf life and the latest acceptable delivery date also matter.

Agree a backup procedure before problems arise. It should specify when alternative purchases are permitted, who approves them and how quickly a decision must be given. Check that a backup supplier can also meet the quality requirements.

Finally, find out what happens to stock you are required to hold when the product range changes. Is there a right to return it, permission to sell through the remaining stock or a buy-back commitment? If none of these arrangements is agreed, your financial projections should not assume that someone else will bear the cost.

4. Use the disclosure requirements and check the contractual protections

In Sweden, the Act on Franchisors' Duty to Provide Information (2006:484) applies. The franchisor must provide clear, understandable written information well before the agreement is concluded. The minimum required disclosures include which goods or services the franchisee must buy or hire, as well as fees and other financial terms.

Ask for a specific account of your purchasing obligations before committing. A general statement that you must follow the franchise concept does not give you the same basis for a decision as a clear description of the scope, suppliers and terms.

However, the disclosure legislation does not itself give you a right to the lowest market price, guaranteed deliveries or unrestricted changes of supplier. Sweden has no comprehensive franchise law governing all the parties' rights. The agreement and general principles of contract law, including the Swedish Contracts Act, are therefore central. Exclusive purchasing requirements may also need to be assessed under the Swedish Competition Act and EU competition rules; they are not automatically prohibited.

Have an independent lawyer review extensive purchasing commitments and ensure that any promised exceptions or backup arrangements are made contractually binding.

Practical takeaway: Do not sign until you can clearly identify what you must buy, its true cost and how you will be allowed to keep operating if the mandatory supplier cannot deliver.