What Franchisees Need to Know About Vendor Contracts When you purchase a franchise, you'll most likely be doing business with some outside vendors. Find out what you're legally responsible for.
By Rick Grossmann •
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The following excerpt is from Rick Grossman's book Franchise Bible. Buy it now.
An integral part of your operation of a franchised business is the purchase of all of your goods, supplies and inventory through vendors approved by the franchisor. This will be most evident in a location-specific brick-and-mortar business such as a restaurant. When one goes into a McDonald's, for instance, everything the customer sees, from napkins and ketchup containers to menu boards and seating, have all been purchased from the vendor system specifically approved by the franchisor. In many cases, it will be the franchisor or their affiliate that's nominated as the sole and only vendor, thereby giving the franchisor an additional revenue stream.
Related: The 19 Covenants of a Standard Franchise Agreement
There's inherently nothing wrong with this arrangement. In fact, it's usual that the franchise system -- acting as a single purchasing entity -- will be able to purchase the goods and services below any other wholesale offering. Unfortunately, there have been in the past, and there certainly will be in the future, franchise systems that fail to put their "customers" -- the franchisees -- first and instead try to grab every last penny, even if it puts the entire franchise system at a competitive disadvantage. There can be nothing more upsetting than to purchase your vegetables from the approved vendor only to learn that you could have gone to a big retail operation and bought the same quality and quantity at a cheaper price.
Though you're required to use vendors approved by the franchisor, your contractual relationship is between the vendor and you, and not between the franchisor and you. Thus, you must read and understand the contract of the contract.
Most vendor contracts are one to two pages long with a simple purchase order on the front and the so-called boilerplate, or fine print, on the back.
Since "the devil is in the details," it's usually not the front side of the vendor agreement that gets the franchisee in trouble -- which just states that the supplier will deliver x for an agreed-upon sum. As you might imagine, it's the fine print on the back that causes the most headaches. For instance, the fine print could state that the supplier is permitted to deliver day-old bread; or, that in the event of any dispute, the parties would have to litigate in the hometown of the supplier that is 50 miles from the franchised business. Absent a claim of fraud or misrepresentation, every sentence of the small print is in most cases as enforceable as the language on the front side of the document. For that reason, the prudent franchisee keeps the number of his or her franchise attorney on speed dial.
Related: The 23 Items That Make Up the Heart and Soul of the Franchise Disclosure Document
Most vendor purchase orders will have the following covenants on the front side:
- Name and contact information of the vendor
- Name and contact information of the franchisee
- Space to list the goods, services and supplies being offered
- Pricing grid showing the price per piece and the total price for each line item
- Statement of the purchase price for all of the goods, services and supplies purchased
- Additional fees (if any) for taxes, delivery and the like
- Final total purchase
The covenants on the back side that control the purchase include the following:
Statement of Acceptance (or similar title). The purpose of this covenant is to make it clear that the vendor will supply only the goods, services and supplies specifically stated on the front side. This same covenant may also state that the purchase order isn't a contract between the parties unless and until the vendor accepts the agreement by signature on the document. The mere fact that the order was taken doesn't mean it's been "accepted." It only means the vendor has the option to accept, reject or offer alternative goods, services, or supplies. As with the franchise agreement, this statement may also specifically disclaim any oral agreements that weren't reduced to writing on the front side of the document.
Statement of how the order may be amended. In the absence of any language concerning an amendment, the vendor may simply refuse to allow any change to the order. In most cases, however, the agreement permits a change to be made: (i) up to a certain time before the order is to be delivered (for example, 24 hours); (ii) if it is in writing; and (iii) if it is accepted by the vendor.
Shipping and handling terms. Most vendors' orders will disclose the manner and method of delivery. If shipping and handling charges are stated on the front, then it will acknowledge that the cost is included as stated. If the type of good, service, or supply is such that these fees cannot be determined at the time of the order, the language should spell out how such fees will be calculated.
Right of inspection and rejection. Anyone who's been in a retail business knows how important it is to immediately open and inspect each and every delivery. Though the law in most states (the "Uniform Commercial Code") spells out inspection periods that are longer than 24 hours, the fact is that the longer an inspection is held off, the more difficult it will be to make a claim. If an item is unacceptable for any commercially reasonable cause, you have the right to reject the item. Even if you have already paid, you have reasonable inspection/rejection rights.
Warranties. Going hand-in-hand with the inspection/rejection rights will be the vendor's form of guaranty that the item delivered is fit for the purpose for which it was purchased (that is, a tomato is edible), and that it will be free from defects in materials and workmanship. If this warranty is violated, then the vendor will replace the damaged item with one in proper condition. If a reasonable inspection could not have discovered the defect, but the defect is later discovered, you may still be able to get the vendor to replace it.
Related: Why You Should Buy a Franchise Instead of Starting Your Own
Indemnification and insurance. Once again, depending on the good, service or supply being purchased, the vendor will insure the goods up to the point that they're delivered to you and, subject to the warranty and right to inspect, you'll be responsible for insurance once it hits your loading dock. In the case of an item that could cause personal injury to the end user (food, for instance), most vendors will also insure that the end user (your customer) will be covered if the product turns out to cause harm.
Additional provisions. As with the franchise agreement, the vendor's contract will contain a statement that the contract is controlled by the laws of a certain state (which, in the case of a national vendor system, may not be your state), that time is of the essence and that the franchisee is not to disclose the terms of the vendor agreement.
