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About supply arrangements
Franchisors often require franchisees to buy goods and services from them or suppliers they choose. For example, franchisors making franchisees buy certain cleaning supplies or ingredients from a specific company.
Sometimes the products and services that franchisors tell franchisees to buy may not be what franchisees would choose if it was up to them. In some cases these products or services may be more expensive than what franchisees can find by shopping around.
The franchisor may make money from controlling supplies to the franchisee. One way that franchisors may make money from supply arrangements is by getting a rebate or other financial benefit from the supplier. This means that the franchisor has a financial incentive to make their franchisees buy from that supplier.
Watch our video on supplier restrictions
We have a short video about supplier restrictions. The video is available in English, Hindi, Chinese simplified and Chinese traditional.
Sometimes when you buy a franchise it’s not up to you where you buy your supplies.
Imagine you’ve just bought a café. You want to make the best coffee in town at the best price. You can buy your milk from anywhere, but you can only buy your coffee beans from one supplier, and they are expensive. You can get coffee much cheaper from other suppliers, but your franchise agreement won’t let you. This is a supply restriction.
Supply restrictions are listed in your disclosure document and your franchise agreement. In many cases supply restrictions are legal. If they are legal and in your franchise agreement, you will have to follow them, even if it costs you more money.
Not sure about the supply restrictions? Get independent advice from a lawyer, accountant, and business adviser about the franchise. Make sure they have franchising experience.
For more information see the website.
Authorised by the Australian Government, Canberra.
Disclosure rules for supply arrangements
Franchisors must disclose supply arrangements
Franchisors must tell potential franchisees in the disclosure document if there are rules about goods or services that franchisees must buy or sell when running the business.
Franchisors have to tell franchisees about rebates and other financial benefits
To make sure that franchisees are aware of the franchisor’s financial interests in supply arrangements, the Franchising Code of Conduct says that franchisors must tell franchisees about rebates and other financial benefits that the franchisor, master franchisor or an associate of the franchisor or master franchisor gets from suppliers.
They must tell franchisees about these rebates and other financial benefits in the disclosure document. This includes details of:
- what the financial benefit is
- the name of the business giving the financial benefit
- the total amount of financial benefit the franchisor gets from the supplier expressed as a percentage of total group purchases from the supplier (excluding franchisor, master franchisor or associate stores)
- if the financial benefit is shared with franchisees. However, franchisors do not have to share rebates or other financial benefits with franchisees.
Supply arrangements and the law
Exclusive dealing
Supply restrictions are also known as ‘exclusive dealing’. Exclusive dealing is when one person trading with another has rules limiting with whom, in what, or where the other person can deal.
Exclusive dealing supplier arrangements are allowed as long as the conduct doesn't have the purpose, effect or likely effect of substantially lessening competition in the relevant market.
Franchisors can seek an exemption from the ACCC to engage in the conduct if they are concerned that their supply arrangements may raise competition concerns.
Unfair contract terms
Some supply restrictions may be unfair contract terms. To be ‘unfair’, a term must:
- cause a significant imbalance in the parties’ rights and obligations
- not be reasonably necessary to protect the legitimate interests of the party advantaged by the term, and
- cause financial or other detriment, such as delay, to a small business if it were relied on.
However, when deciding if a contract is unfair, a court will look at the contract as a whole, including if there are other benefits.
Unfair contract terms in a franchise agreement can attract significant penalties. See our report on Unfair contract terms in franchise agreements ( PDF 426.35 KB ) to learn about compliance checks on franchisors.