If you are starting a franchise, you should think carefully about how to supply the products your franchisees will sell. You will need to decide:
- what products your franchisees will sell; and
- where your franchisees will get these products.
As the franchisor, you are also able to limit your franchisees to only order from a set list of particular suppliers. This selection process ensures the consistency and quality of products across your franchise network. However, restricting your franchisees to specific suppliers may pose certain risks to your business. This article will explore key issues when deciding how you will supply products to your franchisees.
What Are My Options?
There are three common approaches to the supply of products in a franchise. Each approach has different benefits and risks, and how you draft your franchise agreement is up to you as the franchisor. Generally, you can choose to:
- supply or manufacture the product yourself – With this option, you are then able to sell the product directly to your franchisees. While this method grants you maximum control, it also demands significant involvement;
- provide your franchisees with a limited list of approved suppliers from which they may buy. This approach requires less hands-on involvement and is favoured by many franchisors; or
- suggests a list of preferred suppliers without any strict requirements for franchisees to purchase from them. While this method may be suitable for generic products, this method affords the least control over quality standards.
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What Type of Products Should I Supply To My Franchisees?
As the franchisor, you choose what products to supply and which suppliers to approve. The decisions you make will depend on what type of business your franchise is and what products it requires to operate.
Continue reading this article below the formWhat Are The Risks?
Fulfilling Your Good Faith Obligation
If you are approving suppliers or supplying products yourself, you have an obligation to act in good faith. This means that you must be upfront and honest when dealing with new franchisees.
If you mislead or deceive your franchisees about the supply of products, you could face legal action from franchisees or the industry watchdog, the Australian Competition and Consumer Commission (ACCC).
Your Responsibility for Production and Quality
If you manufacture your own products, you have an obligation under Australian consumer law to ensure that the products you supply are not defective or faulty. Failing to do so may also breach your franchise agreement with franchisees.
As the franchisor, it is in your interest to provide your franchisees with good-quality products. You should ensure that either you or your approved suppliers give franchisees the products they need to run a successful business.
If you are unable to provide sufficient quality and quantity of products to your franchisees as your business grows, you may need to find another approach.
Impacting Competition Through Third Line Forcing
Requiring that your franchisees purchase some or all products from a list of approved suppliers is known as third line forcing. As mentioned above, this can be an effective means of growing a franchise and maintaining a high quality of products.
However, the ACCC monitors third line forcing closely in case it reduces competition between suppliers in your industry.
Ultimately, maintaining a balance between franchisor control and fostering fair competition is essential.
Stricter Disclosure Requirements
If you intend to benefit financially (i.e. receive a cash discount) or receive rebates from suppliers in exchange for mandating that your franchisees purchase from them, it is imperative to disclose this arrangement. Under the current regulations of the Franchising Code of Conduct in Australia, the franchisor is obligated to disclose (among other things):
- the nature of the rebate;
- name of the supplier you receive a rebate from; and
- whether the rebates are shared with franchisees.
It is crucial to disclose all of these details to ensure you are following your obligations under the Code and Australian Consumer Law.
Key Takeaways
Before finalising your supply strategy, you must consider the following:
- how responsible and involved you want to be regarding the provision of high-quality products;
- who the best supplier of products is, and whether this could change as your business expands;
- the potential impact of your arrangement on competition between suppliers; and
- what information you must disclose to franchisees.
These issues should be considered in regard to their benefits and risks to your franchised business. You must consider whether to take on a higher level of control in the supply chain and control the source of your products. Taking this approach may:
- improve the consistency of products across your franchise network;
- ensure efficient and cost-effective supply for your franchisees; and
- provide a clear structure and rebate benefit for your business.
For guidance on supplying products to your franchisees, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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