How a Franchise Agreement and a Franchise Disclosure Document differ
There are two documents that are of vital importance...
When buying into a franchise, a question that most people don't consider but probably should is how to source their products. Often, a franchisor will have preferred suppliers whose quality standards they trust implicitly and therefore require franchisees to stick to these suppliers. However, this comes with a few risks that prospective franchisees should be aware of.
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Why Exclusive Supply Contracts Are Used
Exclusive supply contracts allow franchisors to guarantee that all franchisees are selling identical products, albeit at different locations. This is designed to safeguard the franchise's reputation and ensure that the customer experience is identical at all locations.
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The Risks Associated With Exclusive Supply Contracts
1. The first risk is cost. With an exclusive supply contract, you are unable to test the market to establish the best value for money. Essentially, the supplier can charge whatever they deem appropriate, and there is no recourse unless they breach their contractual conditions. However, because the contract is between them and the main franchisor, franchisees may be unable to benefit from any contractual recourse.
2. The second risk is legal in nature. Because the supply contract is between the franchisor and the supplier, the franchisee has no direct contractual relationship with the supplier, meaning that any damage to the franchisee's reputation resulting from inadequate stock supply or failures in stock quality will not be covered by the contract.
3. The final risk is quality. Because franchisees are unable to test the market, they are unable to guarantee that the product they are selling is the highest quality that is available, and this could result in other businesses in the same industry gaining market share in a particular area because they stock a higher quality, but otherwise identical, item to a franchisee.
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What To Do About It
Before becoming a franchisee, it is important to do the necessary legwork to establish what competition exists in the local area. In cases where there are other businesses operating in the same industry, consider what benefits the franchise could bring to the area that aren't already being met.
As always, it is sensible to research the franchise's reputation. Ask the franchisor about supply contracts and rules for sourcing products and materials and ensure that you are content with the answers before proceeding. If you have any concerns, speak to other franchisees to find out how the process for sourcing stock works for them.
Exclusive supply contracts are generally put in place to protect the franchisor, so before becoming a franchisee, it is essential that you understand the contractual requirements and are comfortable abiding by them.
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The Benefits of Exclusive Supply Contracts
1. As a business owner, exclusive supply contracts, free up considerable amount of time as you will not have to research and source supply. Your products will be of a consistent quality and in general should be available to you on a guaranteed and consistent basis. Often franchisors will even have a supply ordering system within their proprietary software.
2. Even though the supplier’s contract is with the franchisor, and not the individual franchisee, the fact that suppliers are bound to an agreement with a large company can mean a greater assurance of quality and supply for you. This reduces stress and time wasted for you, the franchisee, as the larger company can hold the supplier’s feet to the fire should there be a lapse in service or quality.
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