Franchisor Rebates from Suppliers

A possible problem occurs because franchisees can only purchase inventory, supplies, ingredients, services, etc., from suppliers and vendors that the franchisor has approved.  Thus, franchisees are trapped and have few or no options to purchase as they might wish.  However, franchisors must enforce this buying system to establish and maintain uniformity and a common customer experience across the system.

New franchisors are required to disclose to franchise buyers, in the FDD, the maximum amount of rebate that they will receive from franchisee purchases to required suppliers.  In successive years they are required to disclose the actual dollar amounts received in this manner.  Similarly, new franchisors must disclose the maximum markup that will be applied to goods and services sold by the franchisor to franchisees, and in successive years disclose the actual dollar amounts of such profits.

Nevertheless, we are not aware of any requirement that such disclosures be made to existing franchisees.  If a current franchisee wants information about rebates and markups, they could merely obtain a copy of the franchisor's current FDD and see the disclosure, providing that it is accurately and honestly reported.

In our view, from our experience as franchise consultants and not as legal opinion, there is nothing wrong with franchisors receiving rebates from required suppliers or applying a markup to goods and services sold to franchises, providing:

1.  The disclosure in the FDD to future franchisees is open and accurate.

2.  The rebate or markup does not result in the franchisee paying higher prices than competing franchisees of other franchise systems, i.e. a Quiznos franchisee does not have to pay more for the same ingredients than a SubWay franchisee. 

3.  The franchisor uses its buying power to not only help the franchisees buy better than they could on their own, but to buy competitively with other franchise systems. 

In a win-win situation, the franchisor may be able to negotiate a 10% reduction in price, for example, for its franchisees, and then receive 2% of that back as a rebate, saving the franchisees 8% from the price they could obtain on their own.  This is win-win as long as the franchisees can remain competitive in their industry.  If other franchise systems negotiate the same 10% reduction in price, and do not receive a rebate, their franchisees will have an advantage over those in the system receiving the rebate. 

Franchisors must carefully consider the consequences to their franchisees before participating in rebates or establishing a markup program.  Ideally, even though it is apparently not required, the franchisor would let existing franchisees know how much they are making on such required purchases, but this information can cause strife in a franchise system if not handled properly.

More information can be found at:  www.biltmorefranchise.com