Do I have to buy products from my franchisor?

When you’re assessing a new franchise opportunity, it’s important to understand how the franchisor supplies products and the obligations you have as a franchisee.

Franchise agreements often set out detailed rules on what you must purchase, from whom and at what price. They also define the role of the franchisor in negotiating supplier deals, passing on benefits and protecting the brand’s consistency across the network.

Knowing your rights and responsibilities in these areas is crucial for running a successful and legally compliant franchise.

Can a franchisor make me buy all goods from them?

John Pratt, senior partner at Hamilton Pratt, says: “Competition law limits a franchisor’s ability to require franchisees to purchase more than 80 per cent (in value) of their requirements from the franchisor. However, there are exceptions to this rule.”

Exceptions include if the franchisor owns the premises (common in retail franchises) or if the franchise agreement lasts for five years, which is typical in the UK. Pratt notes that this “effectively gives franchisors pretty much a free hand to oblige franchisees to purchase products from them.

“If franchisees are obliged to purchase products from the franchisor, franchisees should protect themselves in terms of the price that the franchisor can charge.

“At the very least, franchise agreements should oblige franchisors that require their franchisees to purchase products from them to supply those products at competitive rates.

“In an ideal world, from a franchisee’s perspective, the franchise agreement should specify the maximum markup over costs that the franchisor can make to those products.”

Do I have to purchase a minimum amount of goods from my franchisor?

Vicky Wilkes, head of legal at Aston Villa Football Club, explains that “all the obligations that both a franchisor and franchisee are bound by should be set out in the franchise agreement. This will specify whether or not there is a minimum level of goods to be purchased.”

In many agreements, there is at least a general duty to “use best endeavours to carry on the franchise business.” Wilkes adds that some agreements make this more specific through minimum purchase commitments.

She also notes: “Almost all franchise agreements will require you to purchase the key products for the franchise from the franchisor or the nominated suppliers. Although this might appear to be a tie, in fact it ensures that the franchised product is consistent across the network. This is a key feature for branded franchises.”

She advises caution: “A prudent franchisee should always check the terms of a franchise agreement. Take legal advice before agreeing to enter into it. If the minimum obligations are too high the franchisee might end up in breach of the agreement.”

Does a franchisor make a profit on goods sold to the franchisee network?

Many franchisees worry that franchisors may increase their profits at the expense of the network. Pratt advises franchisees to ensure price protections are in place.

“Franchisees and their lawyers need to make sure that franchisors cannot increase the price of the goods or services that franchisees are required to purchase and, thereby, increase their profits at the expense of their franchisees.

“All franchise agreements should generally give franchisees ‘comfort’ that prices cannot be increased to uncompetitive rates.”

Pratt acknowledges that most franchisors do receive discounts, commissions or other benefits from suppliers. He says, “Some of these benefits are passed onto franchisees, but perhaps not all. In such circumstances it is generally desirable for the franchise agreement to expressly provide that the franchisor has the right to receive such benefits.

“There is nothing wrong with franchisors retaining some of the bulk buying benefits. However, this is provided that franchisees are still able to obtain the specified goods or services more cheaply than they would be able to independently.”

Does a franchisor receive commission from the suppliers I have to use?

Franchisors often negotiate better deals with suppliers, and may receive commissions. Brian Duckett, former chairman of The Franchising Centre, explains: “One of the advantages of being part of a franchised network is that franchisees ought to be able to purchase goods or services at a far better rate than they would as a sole operator.

“The franchisor usually negotiates the special price. They may then arrange for each franchisee to deal directly with the supplier. Alternatively, they may purchase items centrally and pass them on in smaller quantities to the franchisees.”

Duckett continues: “If the franchisor buys and resells the goods in question, they are likely to make a mark-up, if only to cover handling costs.

“Where franchisees order individually, the franchisor has the choice of whether to pass on the entire benefit of their negotiations to the franchisees or to accept a commission, or retrospective discount, from the supplier.

“There is no reason why a franchisor should not do the latter, provided they are open about such arrangements.

“We have at least one client who puts all the commissions he receives into a fund. This then pays for a large proportion of the cost of the annual franchisee conference. This seems to me to be an excellent idea.”

Final thoughts

Understanding how product supply, pricing and supplier commissions work is essential for any franchisee. From minimum purchase obligations to transparency about commissions, these rules protect both franchisees and the brand.

By carefully reviewing your franchise agreement and seeking legal advice, you can ensure that you benefit from bulk buying advantages while upholding the quality and consistency that the franchise brand requires.