Call for a CONSULTATION: 317-819-0500

Decoding the Franchise Disclosure Document, from A-Z – Item #8

Item #8 of the FDD deals with your products, supplies and inventory. Because the products that you use and supply to consumers are a direct representation of the franchise as a whole, most have strict guidelines on everything from where you can buy your supplies to which brands you can use.

While this may seem trivial, it’s actually quite critical to the success of a franchise.

What you’ll learn:

• The franchises restrictions on buying inventory, supplies and other goods
• The franchisors’ financial interest in the approved suppliers, if any

Essentially, #8 is a list of do’s and don’ts when buying your supplies and inventory.

Why is this important?

First of all, let’s go back to why the success of the franchise, in part, depends on these restrictions.

Part of the attraction and success of a franchise is in its branding and repetition. The franchise executives have created a system that seemingly works, and duplicated it. So maintaining those standards across the board is important to the reputation and growth of the company, as a whole.

Simple.

But the most successful franchises understand that the repetition exists not just in the bigger picture, but in the minute details, as well. Mega franchises such as McDonalds, for example, restrict their franchisees to using specific suppliers and vendors. All of their franchisees purchase the exact same inventory and supplies, which further ensures that quality control is identical across the board. In other words, a customer will get the exact same ketchup at a New York McDonald’s as they will at a Colorado location. This ensures quality branding across the board, because your supplies are part of your brand.

Some franchises will require that you only purchase your supplies directly from them. Others will provide a list of approved vendors. Either way, you need to understand and be OK with this from the outset.

Why is this important to you, specifically? While some see these restrictions as, well, restrictive, others consider them guidelines for success. The franchise has approved their vendors for a reason, and it’s probably for both their benefit and yours. What you do in your location has a direct impact on their pocket books, as well, so don’t think that they’re trying to micro-manage you. They’re simply trying to maintain consistency and efficiency across the brand, which is valuable for all involved.

Understanding the do’s and don’ts of your suppliers and supplies will also help you to avoid challenges down the road. You get to be part of a well-established relationship between the franchise and its vendors. In the ideal setting, you’ll be treated like family, from the beginning, which eliminates the need to find vendors, compare costs, try them out, and so-on. Work to create a healthy business relationship with your approved suppliers and represent your chosen franchise well. Understand what you can and cannot do, systems for ordering, and get to know your contacts well. Establishing this relationship can often ensure that you’ll receive even better service and do right by your franchise family.

Having said that, it’s important to be realistic and understand that your franchise may also be getting other rewards from their supplier(s) of choice. They may accept a kick-back from them, or other revenues. Be sure to note if any of the franchise executives have other financial interests in the approved suppliers. If there are too many ties, it could be a red flag that something else is behind the relationship. The FDD is required to provide this information.

Finally, when considering which franchise is right for you, ask yourself how important it is to you that you have control over your supplies and vendors. If the idea of never being able to switch vendors, even to one that would save you money, bothers you, then you probably shouldn’t buy a franchise that has strict vendor guidelines. Instead, find one that has a longer list of approved vendors or gives you more leeway and breathing room when it comes to your product and supply buying power.

The bottom line is that #8 tells you what you can and cannot buy in terms of your products, supplies and inventory. Know how important control is to you and choose your franchise accordingly.

Next week, we’ll focus on your obligations as a franchisee, as revealed in item #9.