Franchise purchasing requirements: secure supplies before expanding

When turning your existing business into a franchise, your purchasing arrangements need to work for independent business owners too. What the founder can sort out with a phone call must become a clear system for ordering, deliveries and responsibilities. Joint purchasing within a franchise network can help maintain consistent quality, but the requirements must be justified and practical to follow. Start by deciding what genuinely needs to be purchased jointly.

Separate purchases essential to the concept from those left to individual choice

Review the goods, consumables, equipment and external services your business uses. Assess each purchase in terms of customer experience, safety and the ability to operate the concept consistently. Do not base your decisions solely on the suppliers your own business already uses.

Consider dividing purchases into three groups:

• Mandatory product and supplier: where a particular solution is needed for the concept to work.
• Mandatory specification: where quality, function or design must be defined, but several suppliers can meet the requirement.
• Free choice: where franchisees can choose without affecting the shared characteristics of the concept.

You should be able to explain the purpose of every mandatory purchase. A custom-made component may need to be identical across all locations, whereas ordinary office supplies rarely require the same level of control. Also document who assesses alternative products and what supporting information the franchisee must provide.

Avoid wording that makes all future purchases mandatory without clearly defining the scope. A useful purchasing requirement states what it covers, why it is needed and how an equivalent alternative can be assessed, where the concept allows one.

Check that supplier agreements work for multiple businesses

Your current supplier agreement may cover only your own company. Do not assume that the same prices, warranties or delivery terms will automatically apply to future franchisees. Ask the supplier to confirm how independent outlets can join the arrangement and which terms each business must accept.

Decide what role you will take as franchisor. Will you buy and resell goods, negotiate a framework agreement or simply nominate an approved supplier? Each option carries different responsibilities for payment, stock, claims and transport. Negotiating a price does not, in itself, make you responsible for delivery.

In particular, check:

• which locations the supplier can deliver to and the lead times required,
• minimum order quantities, delivery charges and any opening stock requirements,
• credit checks and payment terms for new franchisees,
• who handles faulty goods, returns and warranty claims,
• how price changes and discontinued products are communicated.

Test the terms against the needs of a smaller outlet, not just the volumes purchased by your existing business. A low unit price can prove expensive if the minimum order ties up capital or creates waste. Document these effects before presenting the purchasing arrangement as a benefit of joining the franchise network.

Make purchasing obligations clear and have them legally reviewed

Sweden has no comprehensive franchise law governing the entire relationship. However, the Franchisors’ Disclosure Obligations Act (2006:484) applies. It requires franchisors to provide clear, understandable written information well before an agreement is signed. The minimum disclosure requirements include details of the goods or services the franchisee is obliged to buy or rent.

For your purchasing arrangements, this means the obligations must be specific enough for prospective franchisees to understand them and assess their implications. Describe mandatory purchases, how suppliers are selected and the financial terms that apply. If your company resells goods to franchisees, make that role clear. Also disclose relevant bonuses, discounts and other payments so that the description of the purchasing economics is not misleading.

Pre-contractual disclosure does not replace clear contractual terms. The franchise agreement should set out the scope of the purchasing obligations, while a purchasing schedule can specify product ranges and suppliers. Make sure the documents describe the same arrangement.

General legislation also applies, including Sweden’s Contracts Act and Competition Act, as well as EU competition rules where applicable. Exclusive purchasing requirements may need a competition law assessment. A requirement is not automatically lawful simply because it protects consistency. Have a lawyer review any extensive restrictions tying franchisees to particular suppliers before introducing them.

Decide what happens when supplies fail to arrive

A mandatory purchase creates a particular dependency. Plan for supply shortages before the first franchisee opens. Otherwise, the business owner may be caught between the obligation to follow the concept and the need to keep trading.

Create a simple contingency procedure: who receives reports of supply problems, who approves substitute products and how is a temporary exception documented? Specify which quality requirements must never be compromised. If no acceptable substitute is available, sales of the affected products or services may need to be suspended.

Also clarify how costs are handled under the relevant agreements. Extra delivery charges, spoiled goods or downtime are not automatically covered by the franchisor simply because the supplier was nominated. Avoid promising a level of supply reliability that your supplier agreements do not support.

Practical takeaway: Create a purchasing list with four columns: mandatory requirement, responsible contracting party, total costs and contingency option. Check every row before offering franchises.