When you’re setting up or expanding a franchise network, one of the most critical — and often underestimated — pieces of the puzzle is your supply chain. Who supplies what, from where, and on what terms? These questions don’t just affect day-to-day operations — they have real legal, commercial, and brand implications. That’s why supplier arrangements should be carefully documented in both the franchise agreement and the franchise operations manual, with a clear line of consistency between the two.
It’s also why speaking with a franchise lawyer early on is a smart move.
How Supply Arrangements Are Typically Structured
Franchise agreements usually specify that franchisees must purchase goods and services from either approved suppliers or recommended suppliers — with those terms clearly defined.
-
Approved suppliers are those the franchisor has vetted and formally authorised, and franchisees must use them.
-
Recommended suppliers are those the franchisor suggests but franchisees may not be obligated to use, provided any alternative meets certain standards.
This approach provides contractual clarity while allowing a degree of operational flexibility. Importantly, while the franchise agreement defines the requirement, the actual list of suppliers, contact details, and ordering procedures are generally kept in the operations manual. This makes practical sense — the manual can be updated regularly as suppliers change, new partners are added, or ordering platforms evolve, whereas the franchise agreement is typically not amended during the franchise term.
This separation ensures that supply requirements are clear and enforceable, while giving the franchisor flexibility to adapt the supply chain over time without having to renegotiate each franchisee’s contract.
Common Supply Models
Franchisors tend to follow one of three approaches:
-
Mandated (fully controlled) – Franchisees must purchase all supplies from designated suppliers. This is common in highly standardised systems like quick service restaurants (QSRs), where consistency is crucial. For example, a juice bar franchise might mandate that all fruit pulp, packaging, uniforms, and cleaning materials be sourced through approved vendors.
-
Open (franchisee discretion) – Franchisees are given freedom to choose their own suppliers, within certain quality and brand standards. This is more typical in less systemised or highly localised industries.
-
Hybrid – The franchisor mandates suppliers for core goods (like branded ingredients or software) and permits flexibility for less critical items. This model strikes a balance between consistency and operational freedom and is often preferred in modern franchising.
Again, the franchise agreement sets the rules, and the manual brings them to life with practical details.
Rebates and Kickbacks — Be Transparent
If the franchisor or its associates receive rebates, kickbacks, or any kind of financial benefit from suppliers, this must be disclosed in the franchise disclosure document. This includes marketing rebates, volume-based discounts, or referral commissions. Non-disclosure can lead to regulatory scrutiny and damage franchisee trust.
It’s also a good idea to be clear with franchisees about how these funds are used — for example, whether they go toward system-wide marketing or research and development.
Can the Franchisor Be a Supplier?
Yes — and often, they are. Sometimes the franchisor (or a related entity) is the supplier of core goods, software, or services. This can streamline procurement, improve quality control, and create an additional revenue stream. But again, these arrangements must be disclosed in the disclosure document and clearly permitted in the franchise agreement through a specific operative clause.
This clause should outline the franchisor’s right to supply, pricing transparency, and any review mechanisms.
Ensuring Supply Can Scale
Another key factor: can the suppliers support the whole franchise network — now and into the future? It’s not enough for a supplier to serve ten outlets; they must also be ready to scale to one hundred.
This is particularly important when onboarding new suppliers. Franchisors should regularly review and audit supply arrangements to ensure consistent quality, competitive pricing, and reliable logistics.
What Happens if Supply Is Interrupted?
Good franchise agreements include provisions for:
-
What happens when a regular supply becomes unavailable
-
How franchisees will be notified of changes
-
The process for introducing or approving alternative suppliers
-
Whether franchisees can request or propose their own suppliers
This gives both sides clarity and ensures the network can adapt without confusion or disputes.
Final Thoughts
Your supply chain is a strategic backbone — it affects everything from unit profitability to customer experience. Don’t treat it as an afterthought. Nail down the legal framework in your franchise agreement, but keep the operational detail in your manual for flexibility. The two documents must work in harmony.
And don’t forget: a skilled franchise lawyer can help you set up a supply structure that protects your interests, supports your franchisees, and ensures compliance with the Franchising Code of Conduct. That foundation will serve you well as your network grows.