Item 8: Restrictions on Sources of Products and Services
Content: Item 8 tells you three things about procurement of products and services: 1) which ones you are required to get from the franchisor; 2) the recommended suppliers of goods not provided by the franchisor; and 3) the items that are the obligation of the franchisees to provide for themselves.
Purpose: From the franchisor perspective, this item protects the integrity of the system’s proprietary information and property. From the franchisee standpoint, it provides an awareness of both the obligations and opportunity for procuring the materials necessary for operating the business.
Tips & Advice: This section is important whenever there are a significant number of materials used in the delivery of the product or service and where the material costs are a significant percent of your P&L. There are normally three ways in which you will be allowed to purchase materials:
- When a franchise company requires you buy certain items from them or exclusively from a single supplier, these purchased are considered restricted. For example, a food chain may have a specific recipe that distinguishes it from competitors, or a cleaning service may have equipment or supplies that are proprietary in nature. In other cases, the franchisor simply demands you purchase from them as an additional profit center. If you find a franchisor that has no, or low, royalties, it is guaranteed you will be required to purchase materials from them. This is their royalty.
- The franchisor may designate approved suppliers for the franchisee to use. Vehicles and signage are examples of items the franchisor may acquire through certain contractors. In this case, you normally pay the approved supplier directly for the products you purchase.
- Unrestricted purchases is the designation for routine items the franchisee may acquire without approval, such as towels, copier paper, etc.