Buying a US Franchise: Check Supplier Restrictions

A franchise’s purchasing rules can affect every order you place, from ingredients and packaging to equipment and cleaning materials. Shared standards can support consistency across a franchise community, but they can also limit your ability to shop around. Before buying a US franchise, establish who you must buy from, how prices can change and what happens when a required supplier cannot deliver.

1. Start with Item 8 and the contract

The Federal Trade Commission’s Franchise Rule requires pre-sale disclosure through a Franchise Disclosure Document (FDD). Item 8, Restrictions on Sources of Products and Services, is the starting point for investigating purchasing obligations. The rule provides disclosure protections; it does not guarantee that required suppliers offer competitive prices.

Item 8 addresses requirements to purchase or lease specified goods, services, supplies and equipment from the franchisor, designated suppliers or suppliers meeting the franchisor’s specifications. It also covers matters such as supplier approval procedures and certain financial interests connected with required purchases.

Read it alongside the franchise agreement and relevant purchasing standards in the operating manual. The FTC does not require a franchisor to give you its manual, so request access to the sections needed to understand these obligations before committing.

Create a purchasing list with three categories:

• Exclusive source: you must use one named supplier or the franchisor.
• Approved suppliers: you may choose from a restricted list.
• Specification-based purchasing: you may source elsewhere if the products and supplier satisfy stated requirements.

Do not assume that permission to choose a supplier means you can choose different products.

2. Calculate the delivered cost, not just the catalogue price

Ask for current supplier price lists and sample invoices relevant to your proposed location. A headline unit price may exclude freight, minimum-order charges, refrigeration, installation or handling. Remote locations and smaller outlets may face different practical costs from larger operations.

For your most important recurring purchases, ask:

• What is the minimum order, and how frequently must I order?
• Are delivery charges fixed or variable?
• When is payment due, and is a deposit required?
• Who bears the cost of damaged, expired or incorrect stock?
• Can prices change without advance notice?
• Are equipment maintenance and replacement parts restricted too?

Have your accountant model these costs using your expected purchasing volumes. Test the effect of higher input prices without assuming you can immediately increase customer prices.

Check stockholding requirements as well. Bulk discounts may offer little benefit if you need extra storage or cannot use the products before they expire. The useful comparison is the cost of usable stock delivered to your premises, not the supplier’s advertised discount.

3. Understand supplier income and purchasing benefits

Required purchasing arrangements may generate revenue for the franchisor or provide other benefits. Item 8 requires disclosures about certain franchisor revenue and material benefits arising from required purchases, including the basis on which that revenue or benefit is received. It also addresses relevant ownership interests and purchasing arrangements.

Read these disclosures without assuming either that all supplier payments are improper or that every discount reaches franchisees. Central purchasing can support product consistency and availability, but its financial benefits may be distributed in different ways.

Ask the franchisor to explain:

• Whether supplier rebates or other benefits are retained or passed on.
• Whether purchasing co-operatives or negotiated arrangements exist.
• Whether franchisees receive statements showing any allocated benefits.
• Whether meeting purchasing conditions affects eligibility for other benefits.

Distinguish a contractual entitlement from a discretionary arrangement. If the sales presentation promises savings, ask how those savings were calculated and whether the contract actually protects the arrangement being described.

4. Check alternatives and supply-failure procedures

An approved supplier list is only useful if its suppliers can serve your location reliably. Ask who delivers locally, what lead times apply and whether a back-up supplier is already authorised.

If you want to propose another supplier, establish the approval process. Ask about testing charges, required documents, decision times and whether approval can later be withdrawn. Do not assume the franchisor must accept a cheaper supplier simply because you consider its products equivalent.

Request written clarification of emergency procedures. Can you buy substitutes during a shortage? Who grants permission, and how quickly? What happens if missing supplies prevent you from trading while your contractual obligations continue?

Ask a US franchise solicitor to review the purchasing clauses and applicable state law. Some states provide additional franchise relationship protections, but there is no universal right to ignore supplier restrictions. Any negotiated exception should be documented in the signed agreement or an appropriate addendum, rather than left as an informal assurance.

Practical takeaway: Before signing, build a supplier cost sheet and a supply-failure plan. Proceed only when you understand your purchasing obligations, their realistic delivered costs and the written process for obtaining alternatives.