Buying a US Franchise: Check Supplier and Purchasing Rules

A franchise may offer a recognisable brand and established operating methods, but it can also restrict where you buy equipment, ingredients, stock and services. Within the US franchising community, purchasing controls can help maintain consistent quality. They can also limit your ability to negotiate prices or respond to shortages. Before choosing a brand, investigate how its supply arrangements would affect your business.

1. Start with FDD Item 8, then check the contract

The Federal Trade Commission’s Franchise Rule, at 16 CFR Part 436, requires covered franchisors to provide a Franchise Disclosure Document (FDD). Item 8, titled ‘Restrictions on Sources of Products and Services’, is the starting point for understanding compulsory purchases and approved suppliers.

Read it alongside the franchise agreement and any purchasing provisions incorporated through the operating manual. Identify purchases that must come from the franchisor, an affiliate, a designated supplier or a supplier meeting specified standards.

Build a simple purchasing register covering:

• Products and ingredients used in everyday trading.
• Equipment, signs, furniture and replacement parts.
• Software, payment processing and other required services.
• Packaging, uniforms and promotional materials.
• Insurance or other purchases subject to approval requirements.

For each entry, record who selects the supplier, whether alternatives are permitted and where the obligation appears in the documents. Distinguish a genuinely compulsory purchase from a recommendation made during a sales presentation.

Item 8 includes disclosures about the estimated proportion of purchases subject to restrictions. Treat that information as a guide to your exposure, not a substitute for checking the particular purchases your outlet will need.

2. Understand who benefits from your purchases

A compulsory supplier is not automatically a poor deal. Consistent specifications, reliable distribution and collective purchasing power can benefit franchisees. However, approval by the brand does not establish that prices are competitive.

Item 8 requires disclosures about certain financial interests and benefits connected with required purchases, including whether the franchisor or its affiliates derive revenue or other material consideration from them. It also addresses certain supplier ownership interests, purchasing cooperatives and negotiated purchasing arrangements.

Ask the franchisor to explain:

• Whether it or an affiliate sells required goods directly.
• Whether suppliers pay rebates or other benefits to the franchisor.
• Whether any savings or rebates are passed to franchisees, and how.
• Whether purchases attract delivery charges, minimum-order requirements or surcharges.
• Whether purchasing targets affect access to contractual benefits.

Do not assume a rebate belongs to franchisees. Establish what the disclosure and binding documents actually say about its treatment.

Request representative current supplier price lists and delivery terms. Compare the total delivered cost with equivalent products meeting the same specifications, rather than comparing a branded item with a cheaper but unsuitable alternative. Availability, warranty support and payment terms also matter.

3. Test flexibility before a supply problem occurs

The practical question is not simply whether you can use another supplier. It is whether the approval process would work quickly enough when your business needs it.

Item 8 addresses whether alternative suppliers may be approved, the approval process and associated fees. Ask for any available written procedure and find out who handles applications.

Use a realistic scenario: your designated supplier cannot deliver an essential product for a week, but a local distributor has a suitable replacement. Would you need written permission before buying it? Who could give that permission? Would you have to stop selling the affected product while waiting?

Clarify whether you would pay for testing an alternative product and whether approval applies only to your outlet or across the network. Ask how supplier approval can be withdrawn and what happens to stock already purchased.

Check equipment arrangements too. A low purchase price may be less attractive if servicing is available from only one distant contractor. Establish who bears repair, replacement and interruption costs, and whether backup arrangements are documented rather than merely promised.

4. Assess your rights and make a buying decision

The FTC’s Franchise Rule is principally a disclosure rule. It does not give franchisees a general right to select their own suppliers, nor does disclosure make a restrictive purchasing arrangement commercially attractive.

State law can add protections. For example, the New York Franchise Sales Act generally requires registration before covered franchise offers or sales unless an exemption applies. Other states have their own registration, disclosure or franchise relationship laws. Registration is not an endorsement of supplier prices or the investment.

Ask a US franchise solicitor familiar with the relevant state to review purchasing obligations, the franchisor’s power to change them and any applicable statutory protections. Purchasing restrictions are not automatically unlawful; competition-law questions require analysis of the specific arrangement.

Have your accountant test how supplier price rises, larger minimum orders or shorter payment terms would affect margins and cash availability. If essential flexibility is promised, ask your solicitor whether it should be recorded in a signed contractual provision.

Practical takeaway: Before committing, obtain a purchasing register, representative delivered prices and a written explanation of alternative-supplier approval. Proceed only when you understand both the costs and the limits on your choices.