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Authorized Suppliers and Volume Rebates

Written by : Joseph Adler
2008-08-15
It is generally agreed that it is in the best interest of the franchise system as a whole that the uniform standards, methods, procedures, techniques and specifications of the franchisor’s system be fully adhered to by all franchisees. Accordingly, most franchise agreements require that the franchisee offer for sale only those products and services, and use and install only such inventory, equipment, signs, furnishings, forms and other items, as are from time to time authorized in writing by the franchisor. The franchise agreement will typically require the franchisee to purchase all such products and services from the franchisor, an affiliate of the franchisor or a franchisor-approved supplier.

One of the corollary benefits of requiring this uniformity in products and services is that the franchisee can take advantage of the franchise system’s volume purchasing. In many cases, the franchisor may realize a profit or receive rebates, discounts or other allowances as a result of such bulk purchasing by franchisees and corporate outlets. While such profits or allowances need not be shared with franchisees, the existence of such profits or allowances should be disclosed to franchisees. For example, if applicable, the franchise agreement should contain the following language:

Franchisee shall have the right to participate, on the same basis as other franchisees of Franchisor, in group purchasing programs for products, supplies and services which Franchisor may from time to time use, develop, sponsor or provide. Franchisor may, from time to time, receive rebates, discounts or other allowances in respect of such group purchasing programs which Franchisor shall be entitled to retain for its own use and credit without accounting to Franchisee in respect thereof.

In the event the franchisee desires to obtain products or services from suppliers other than those pre-approved by the franchisor, the franchise agreement should include a detailed approval process. Such a process will typically require the franchisee to provide samples or submit to certain testing and to obtain the franchisor’s approval before sourcing a product or service from outside of the system.

Security

It is common for a franchisor to take a security interest over the franchisee’s assets. This is especially the case where the franchisor or an affiliate of the franchisor is the sole or primary supplier of products and services to the franchisee.

As security for the payment and/or performance by the franchisee of its obligations under the franchise agreement or under any other agreement or arrangement with suppliers to the franchisee, the franchise agreement will include a provision requiring the franchisee to enter into such agreements and execute such documents as may be requested by the franchisor or such suppliers, including the execution of security documentation and guarantees. Such security is usually taken by way of a general security agreement. The franchise agreement and general security agreement should contain a cross-default provision.

The security interest must be registered and perfected in accordance with applicable provincial laws. The franchisor should ensure that it has filed the necessary documents in the personal property registry system of each province in which the franchisee is carrying on business.

Advertising

As noted above, franchisees may be required to contribute to an advertising fund. Such advertising funds are typically created in recognition of the value of standardized advertising and promotion of the franchise system on a national and/or regional basis. National and/or regional advertising funds are more common where the franchise is an established and mature system.

Typically the franchisor will be responsible for all decisions relating to the maintenance, direction and administration of the advertising fund and the selection of the particular media (i.e., radio, television, Internet or print). At a minimum, the franchise agreement should address the following issues related to advertising:

  • Will the advertising fund be accounted for separately from other funds of the franchisor?

  • Will the advertising fund be used to defray any of the franchisor’s administrative, personnel and overhead costs incurred in relation to the administration or direction of the advertising fund?

  • How will the expenditure of the advertising fund contributions be accounted for?

  • Will the franchisor’s corporate outlets be required to contribute to the advertising fund?

  • Will franchisees also be required to expend a specified minimum amount on local advertising?

  • Will there be any restrictions on the franchisee’s ability to advertise in telephone directories, on the Internet, on websites or through electronic mail?
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