What Is Approved Products
Approved products are specific goods, materials, or services that a franchisor designates as the only items a franchisee can use in operations. The franchisor maintains control over which suppliers, manufacturers, and product lines meet brand standards. You must source from this pre-approved list, regardless of whether cheaper alternatives exist in the market.
Disclosure Requirements
The franchisor's approved products list appears in Item 19 of the Franchise Disclosure Document (FDD). This section must detail any rebates, revenue sharing, or other financial arrangements the franchisor receives from approved suppliers. If the franchisor owns an Approved Supplier or receives commissions exceeding 5% of the product cost, this must be disclosed. Many franchisors generate significant revenue from these arrangements, sometimes equaling 10-15% of total franchise system revenue.
Item 19 also requires disclosure of any required purchases from the franchisor itself. This is distinct from Item 16, which covers optional goods and services the franchisor offers.
Financial Impact on Your Unit Economics
Approved products directly affect your operating margins. You need to calculate the total cost of approved products as a percentage of gross revenue during your initial financial analysis. For a typical quick-service restaurant franchise, approved products and supplies can represent 25-35% of revenue. In retail franchises, this figure often ranges from 15-30%.
Request a complete 3-year price history from existing franchisees. Ask whether the franchisor has increased approved product prices above inflation rates. A 3-5% annual increase is common, but some systems have raised prices 8-10% annually. These cumulative increases compound over your franchise term and directly reduce profitability.
Renewal and Territory Implications
Your franchise agreement likely ties approved products compliance to renewal eligibility. Failure to use only approved products can be grounds for non-renewal under most franchise agreements. Some franchisors include product compliance audits in their inspection protocols, with violations documented and carried into renewal negotiations.
Territory rights may also depend on approved products purchasing. Some franchisors condition exclusive territory protection on meeting minimum approved product purchase thresholds. If you fall below these thresholds, they may reserve the right to open competing locations in your territory or reduce your renewal term.
Franchisor Obligations You Should Verify
- Maintain a written approved products list and provide updates within 30 days of any changes
- Ensure approved products remain competitively priced against industry standards (within 10-15% of comparable non-franchised alternatives)
- Disclose all financial arrangements with suppliers in the FDD and annual updates
- Provide reasonable notice (typically 60-90 days) before discontinuing an approved product or adding mandatory new suppliers
- Allow substitutions if an approved product becomes unavailable or if you demonstrate a comparable product meets brand standards
Questions to Ask Before Signing
- What percentage of my operating costs will approved products represent based on the franchisor's financial projections?
- Has the franchisor increased approved product prices in the past 5 years, and by what percentage annually?
- What financial arrangements does the franchisor have with approved suppliers, and are these disclosed in the FDD?
- Can I source from alternative suppliers if they meet quality standards, or is the approved list completely mandatory?
- What happens to my renewal rights if I use non-approved products, and what is the cure period?
- How often does the franchisor audit approved products compliance, and what are the penalties?
Common Questions
Can I negotiate approved products requirements before signing the agreement?
Rarely. Most franchisors treat approved products as a non-negotiable system standard. However, you can negotiate exemptions for specific product categories, geographic sourcing flexibility, or longer price-lock commitments from suppliers. Get these concessions in writing as addendums to your franchise agreement. Some franchisors offer 2-3 year price guarantees for top-volume approved products if you commit to minimum annual purchases.
What if an approved product is discontinued or becomes too expensive?
Review your franchise agreement's substitution clause. Most require the franchisor's written approval for alternative products. This process typically takes 30-60 days. During supply chain disruptions, some franchisors have granted temporary waivers. Document all requests in writing. If the franchisor refuses reasonable substitutions and the product becomes unavailable, you may have grounds for a material breach claim, though litigation is expensive and time-consuming.
Do approved products costs increase predictably?
No. Speak directly with franchisees who have been in the system for 5+ years about price increases. Some systems maintain stable pricing; others increase prices annually. The FDD should show historical price data for key products. If this information is missing or vague, request it directly from the franchisor before signing. Price increases tied to inflation are standard; increases beyond inflation warrant scrutiny.