If you decide that franchising is the way to go to start your own business, make sure you understand the options for your merchandise and supplies. Suppose you’ve purchased a maid service franchise. You’ve hired a first‐rate staff, and they’re ready to get busy scouring, wiping, dusting, and polishing. But elbow grease isn’t enough; they need cleaning products.
You may not have the option of hopping over to the local warehouse store and loading up a cart. Your franchisor may require you to purchase products directly from the company. Or your franchise agreement may specify that you use only franchisor‐approved suppliers or authorized products. These rules ensure that the supplies you use meet the franchisor’s standards. A bonus to you is that, because the franchise system may buy in large volume, prices may be lower.
Buying goods direct from your franchisor
When franchisors elect to be the exclusive suppliers to their franchisees, the requirement usually extends only to items that are proprietary or that contain certain key ingredients. These products may be ordered directly from the company, or in most systems, the franchisor has provided the products to the distributors that serve the system.
Nonproprietary merchandise and supplies are another matter. Even if the franchisor distributes the goods, they usually aren’t the exclusive suppliers, and franchisees have the option of making their purchases from either approved suppliers or from their own chosen vendors.
Many of the legal disputes over the past two decades have resulted from franchisees’ perception that they are getting gouged — that is, the products they must purchase from the franchisor are excessively marked up, making the franchisee less competitive. Rupert Barkoff, Partner at Kilpatrick Stockton LLP in Atlanta, Georgia, warns, “Beware of franchisors who require that certain products be purchased through them. It is easier for a franchisee to digest the franchisor’s decision that products must be purchased from the franchisor when the product sales are not a profit center for the franchisor.”
Although the methods the franchisor uses for supplying products are in the UFOC, the franchisee usually gets additional information on supplier relationships at training.
Getting merchandise and supplies from approved and required suppliers
Rather than inventory all the merchandise required for a network of franchisees, some franchisors give franchisees a list of approved suppliers from whom they can buy their items directly. As long as the approved suppliers sell only the merchandise approved by the franchisors — without unauthorized substitutions — franchisors can maintain control over the quality of the products sold under their brand.
A good franchisor is the keeper of the brand. In that role, the franchisor’s representatives identify, screen, and approve suppliers to the system. Suppliers come in all shapes and sizes, and your franchisor has hopefully sifted through the best of them for you. Before you chafe over having to use only a franchisor’s choice of suppliers, curb your entrepreneurial spirit and read on.
A good franchisor wants to keep your operational costs as low as possible to help you make as much money as you can. If a franchisor has gone to the trouble — and expense — of finding good suppliers for you, take advantage of that effort! Of course, ask your fellow franchisees whether they’re happy with their suppliers. If they are, be thankful that finding good suppliers is one less item on your to‐do list.
Franchisors worth their salt negotiate with manufacturers for the lowest net prices on goods, for marketing support, and for other benefits. Check with your franchisor about the way rebates are handled in your system. The procedure is far from uniform among franchisors or among suppliers. Also, if you discover that a supplier in your area meets your franchisor’s criteria and is less expensive than the franchisor’s authorized suppliers, make sure to pass the information on to the franchisor’s headquarters.
Buying products authorized by the franchisor
All franchisors — big, small, or in‐between — require consistency in the products sold under their brands. Product standards and specifications are one of the keys to controlling product consistency.
Franchisors set product standards and specifications, which means that they tell their franchisees what type and quality of products to buy. As long as franchisees follow these rules, they can choose their own vendors. This practice is common in small franchise systems, but even big franchisors often allow franchisees to buy items locally, as long as those products meet the standards.
Buying goods through cooperatives
Several franchise systems use cooperatives, or buying groups, to purchase products, marketing, advertising, insurance, leasing, credit, and other goods or services.
Cooperatives are by no means uniform in how they function and whom they represent. Many are started by franchisees, and the franchisor isn’t part of the buying group. Other cooperatives include both company‐owned and franchisee‐owned locations. Still others represent members from several franchise systems.
The value of joining a cooperative is that group purchasing lowers prices. This method gives you a competitive advantage over those who can’t buy as cheaply. Also, large buying groups often get better access to new products, better allocation when products are scarce, and better service from suppliers when things go wrong.
Franchisees and/or franchisors purchase membership in the cooperative and commit to buying a certain percentage of their requirements through the cooperative. Cooperatives are controlled by the members, typically on a one‐member, one‐vote basis, with members determining the officers, directors, policies, and procedures adopted by the cooperative.
Cooperative members may also share in what are called patronage dividends, which, like stock dividends, are distributions of the earnings of the cooperative. However, patronage dividends differ from stock dividends in one major way: Stock dividends are based on the number of shares you own, whereas patronage dividends are based on the amount of your purchases from the cooperative. The more you buy, the more you get back in patronage dividends.
Of course, when you purchase through a cooperative, you still must meet the standards and specifications your franchisor has set for your location.