As an emerging franchisor, your vendor network is one of your most critical—and often overlooked—assets. The right vendors can help you scale smoothly and keep franchisees happy. The wrong ones can drag your system down, spark complaints, or even expose you to liability. These are some of the common legal and operational considerations that we often assist our clients in managing:
Vendor Designation
Franchisors are subject to antitrust laws when it comes to their vendor network, and one of the key considerations under this legal regime is establishing the vendors that franchisees can be required to use within the system.
Tip: While requiring vendors bears some scrutiny, franchisors may always establish specifications for products and services that are used within the brand – especially when quality, safety, or brand integrity is at stake.
Franchisors can always set specifications – but requiring the use of a specific vendor must pass scrutiny. Most franchisors create a system vendor list that includes three tiers of vendors: required, preferred, and approved. In order for a vendor to be required, the services or product that vendor provides must meet certain criteria to establish that it cannot be obtained elsewhere from a brand consistency standpoint. Preferred vendors are those that have been vetted to meet the franchisor’s requirements and specifications – and multiple vendors may exist in this category. Approved categories are some of the smaller items that can be purchased from local or multiple sources as long as specifications are met.
Tip: We recommend that our client come up with objective standards around their vendor qualification process – including their ability to scale, meet fulfillment timelines, communicate effectively, work in the regions in which the system exists, and otherwise provide quality products and services.
Contracts
Our recommendation is that every material vendor relationship should be governed by a written agreement with the franchisor. Many times, this agreement will look differently than a standard services agreement. Instead, the franchisor will be designating and authorizing the vendor to work with the franchise system, setting key timelines, potentially authorizing the use of its confidential information and logos, and other important legal restrictions. The franchisor may also negotiate advantageous pricing on behalf of the system within this agreement.
Best Practice: We work with our clients to create a form designated vendor agreement that they can adapt to each vendor relationship – as well as a process to review the agreement that the vendor utilizes within the network.
Pricing & Rebates
One of the often touted benefits of a franchise system is the ability to scale purchasing power with a larger system. Many vendors will be willing to provide preferred pricing based on planned future growth of the franchise system. As mentioned above, franchisors often will negotiate system-wide pricing that is advantageous to their franchisees, as a benefit to being part of the franchise system. Franchisors also commonly negotiate “rebates” or other incentives from approved vendors as part of the relationship. Legally, this type of provision is permissible, subject to certain restrictions. First, franchisors must provide full and transparent disclosure of these rebate relationships in its Franchise Disclosure Document. Second, franchisors must ensure that negotiation of a rebate doesn’t increase the price that franchisees must pay, beyond that of where they could obtain the item with the same specifications elsewhere.
Best Practice: We work with our clients to review their practices and existing vendor agreements to ensure all required disclosures are properly made.
Tip: Some franchisors choose to structure a system whereby any rebate or incentive revenue is used on behalf of the system – such as contributing these amounts to their national advertising fund.
Communication
Vendors can often be an extension of the franchisor – and can often reflect on the franchisor and its business practices, as well as serve as a key source of information to the franchisor as to what franchisees are experiencing in the field. We recommend establishing key personnel that maintain the vendor relationships, consistent communication processes, and ensuring that franchisees are updated on a regular basis as to changes to the vendor list.
