What Franchisees Need to Know About Vendor Contracts

If you’ve been involved in the business world for some time, you might already be familiar with vendor contracts and agreements. These contracts are not unique to the franchising space; they exist in just about every industry imaginable. However, if you’re considering becoming a franchisee, it’s essential to understand the significance of vendor contracts and what they could mean for you and your business.

What Is a Vendor Contract?

When you decide to open a franchise, you are not just signing an agreement with the franchisor; you are also entering into a vendor contract. This means that, for the duration of your ownership, you’ll be partnered with specific vendors who will supply everything you need to run your franchise, whether it’s everyday essentials like paper towels or audit rolls to more significant items like furniture.

While this setup can be convenient, there’s another side to it. Many franchisors require their franchisees to only use pre-approved vendors. These vendors have been vetted and selected by their franchisor, often under an agreement that allows the franchisor to benefit from reduced prices or other advantages. Although this can be advantageous in certain cases, as Rick Grossman, the author of “Franchise Bible” notes, this can raise concerns about whether the franchisor is actually acting in your best interest.

“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,” Grossman noted to Entrepreneur. “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.”

Despite these potential pitfalls, working with pre-approved vendors can also have positive aspects. As North American Signs recognizes, for instance, by maintaining a consistent relationship with your vendors, you can ensure that your franchise location stays true to the brand identity. This consistency contributes to overall brand recognition and customer loyalty, which are vital for the long-term success of any franchise business.

“Healthy relationships are long-lasting, and create value over time for both the client and the vendor,” wrote North American Signs. “It’s rarely a good idea to switch from vendor to vendor to find the quickest and cheapest solution to your problem. Instead, you should establish lasting relationships with your vendors so that you and your business are known. Your needs will be prioritized and met well into the future.”

What’s Included In a Vendor Contract?

For the most part, vendor contracts tend to share common elements that outline the terms and conditions of the business relationship. It’s important to understand what these contracts entail to help you better understand what sort of relationship you’re getting into.

Trembly Law, the franchise and business-focused law firm, notes there are a few specific things all vendor agreements should contain. These include:  

• Scope of Services or Products

The contract should clearly define the scope of the services, products or supplies the vendor will provide. This section will outline the specific items or services you will receive, ensuring both parties are on the same page regarding expectations.

•  Contract Length and Duration

The contract will also specify the duration of the agreement, indicating when it starts and ends. Understanding the contract’s timeframe is essential, as it can affect future negotiations and business planning.

• Pricing and Payment Terms

The pricing details for the products and services will also be included in the contract for your review. It should also provide information related to the payment terms, such as the frequency of payments and accepted methods of payment.

• Termination Clause and Breach Consequences

The vendor contract should also include a termination clause, which outlines the conditions under which either the franchisee or the vendor can end the agreement before its natural end. However, if you’re required to sign with a pre-approved vendor through your franchisor, you may not be able to exit the vendor contract. This varies on a case-by-case basis, and you would need to speak to your franchisor for more information.

Additionally, the contract will likely state the consequences for breaching the agreement, which could involve penalties, additional fees or potentially even legal action.

Read the Fine Print

Before you decide to sign anything, it’s recommended that you carefully read and analyze not only the franchise agreement but the vendor contract as well. Some contracts may contain hidden fees or penalties for non-compliance that could catch you off guard. If there’s anything you’re uncertain about, it’s worth considering hiring a franchise attorney to help you better understand your obligations as a franchisee.

Vendor contracts play a significant role in the franchising world. As a franchisee, it’s vital not to overlook these types of contracts. Make sure you read the fine print and understand what you’re signing so you can make clear, concise decisions that will impact the potential success and longevity of your franchise.