Does a franchisor make a profit on goods sold to the franchisee network?

In many franchise agreements franchisors require their franchisees to purchase products or services either from the franchisor or from the franchisor’s nominated suppliers. This means that if a franchisee purchases from an alternative source they would be in breach of the franchise agreement. In such circumstances franchisees and their lawyers need to make sure that franchisors cannot increase the price of the goods or services that franchisees are required to purchase and, thereby, increase their profits at the expense of their franchisees. All franchise agreements should generally give franchisees ‘comfort’ that prices cannot be increased to uncompetitive rates.  The great majority of franchisors do receive discounts, commissions and other benefits from suppliers. Some of these benefits are passed onto franchisees, but perhaps not all. In such circumstances it is generally desirable for the franchise agreement expressly to provide that the franchisor has the right to receive such benefits. There is nothing wrong in franchisors retaining some of the bulk buying benefits, provided that franchisees are still able to obtain the specified goods or services more cheaply than they would be able to independently.