Buyers study the royalty rate because it's a percentage with a name, printed in the fee tables where everyone looks. The money that leaves through the supply chain carries no such label. In most systems you don't simply buy what you need; you buy specified goods from specified sellers at prices you didn't negotiate, and sometimes the franchisor collects something on the way through. That second transfer is disclosed and legal, and it can be larger than the royalty — but you have to open Item 8 to see any of it.
What Item 8 actually obligates you to buy
Item 8 of the Franchise Disclosure Document is titled "Restrictions on Sources of Products and Services," and the federal rule behind it requires the franchisor to disclose your obligations to purchase or lease "goods, services, supplies, fixtures, equipment, inventory, computer hardware and software, real estate, or comparable items" either from the franchisor, from its designee, from suppliers it approves, or under specifications it issues (16 CFR § 436.5(h)). Read it slowly: it covers nearly everything a business spends money on outside labor and rent. A required-purchase clause can reach your food and packaging, your uniforms, your point-of-sale system, your equipment and its replacement parts, your insurance, and in some systems the software you use to schedule staff.
The item also has to name the good or service that's required, state whether the franchisor or its affiliates are approved suppliers — or the only approved supplier — and disclose any supplier in which an officer of the franchisor holds an interest. None of that is inherently sinister. But the disclosure exists because the arrangement puts the franchisor on both sides of a transaction, as the party setting your standards and, sometimes, as the party selling to you.
The two numbers that turn Item 8 into a budget
Two subparagraphs do most of the useful work. The first requires an estimate of the proportion your required purchases and leases represent out of all your purchases and leases. That single figure tells you how much of your cost of goods is effectively fixed by contract rather than by your own shopping. A system where required purchases are a small slice leaves you room to manage margin locally; a system where nearly everything is designated means your gross margin is set by someone else's supplier agreements, and your only levers are labor, rent, and volume.
The second requires the franchisor to disclose revenue it or its affiliates derive from required purchases and leases — including its total revenue, its revenue from those purchases, and what percentage of the total that represents. This is the number to sit with. It tells you whether you're joining a system that earns primarily by collecting royalties on your sales, or one that earns substantially by selling you supplies. A franchisor paid on your revenue does better when your unit does better. A franchisor paid on your purchase volume does better when you buy more, which is not always the same thing.
Rebates, allowances, and the franchisor's other revenue line
The disclosure also reaches arrangements that run the other direction: payments made by designated suppliers to the franchisor. In practice that looks like a rebate, a marketing allowance, or a per-case payment, and the franchisor has to state its basis — a percentage, or a flat amount. The question that matters to you is what happens to the pricing underneath that deal. Concentrated buying genuinely can produce prices no independent operator could get, and a good system passes real savings down. It can also produce a price that includes the rebate and lands on your invoice anyway.
Item 8 additionally requires disclosure of purchasing or distribution cooperatives where they exist, which is worth noticing for the opposite reason. A co-op franchisees participate in, sometimes with visible pricing and franchisee representation, is a materially different structure from a designated supplier that pays the franchisor for access — and only one of the two gives you any line of sight into how your prices get set.
The approval process for an alternative supplier
Most systems allow, on paper, for a franchisee to propose a different supplier. The rule requires the franchisor to describe how that works: the criteria it uses, whether those criteria are available to franchisees, whether the proposed supplier has to consent to inspection, whether there's a fee to submit a request, how long a decision takes, and how approval can be revoked. That description tells you more than the promise that alternatives exist. A process with published standards and a stated decision window is one you could actually use; a process that reserves complete discretion, charges to evaluate a request, and sets no timeline is a formality.
What the FTC said about charges that never made it into the FDD
There's a related problem worth knowing about, because it sits right next to required purchases. On July 12, 2024, FTC staff released guidance on the unlawfulness of undisclosed fees imposed on franchisees, stating that a franchisor's failure to disclose required fees in the FDD violates the Franchise Rule, and that imposing or collecting a new fee that was never disclosed and never included in the franchise agreement may be an unfair practice under Section 5 of the FTC Act. It also points to FTC v. Orkin Exterminating Co., where the Eleventh Circuit in 1988 upheld the Commission's finding that raising a contracted fee unilaterally was unfair even though nothing about the original sale was deceptive.
Two caveats belong with that: the document represents the views of FTC staff rather than the Commission, and staff was explicit that any determination is fact-specific. What it usefully gives a buyer is a standard to hold the paperwork to — the charges a franchisor can require of you are supposed to be the ones you could read before you signed. If a system's real cost structure only becomes visible after closing, that's a reasonable thing to raise with an attorney.
How to price required purchases before you sign
Start by reading Item 8 line by line and writing down every category you're obligated to buy through the system. Then ask the franchisor for current price lists or a representative order from a designated supplier — not a percentage, actual prices on actual items — and build a rough cost-of-goods estimate for the volume you expect. Compare it against what those inputs cost outside the system. Where a required item has no open-market equivalent, note that too, because a proprietary input is a price you have no independent check on.
Then use the Item 20 contact lists. Ask franchisees how many times a required supplier changed in the past few years, what each change cost them in equipment, retraining, or wasted inventory, and whether their prices moved up or down after it. Ask whether anyone in the system has successfully had an alternative supplier approved, and how long it took. Franchisees who buy every week know things about the supply chain that no disclosure item captures, and this is the part of due diligence where they're most useful.
Pricing the supply chain into the deal, not around it
The goal isn't to find a system without required purchases, because a brand with no purchasing standards is offering less than it appears to. It's to know what the arrangement costs you and who benefits from it, then treat that as part of the price of the franchise rather than as background noise. Build your unit economics from designated-supplier prices, not from the cheapest inputs you can imagine sourcing, and read the franchisor's purchase-related revenue percentage as information about incentives rather than as an accusation. When the numbers in Item 8 look material to your margin — which for a food or retail concept they usually will — bring them to an accountant who can run them against your projected volume, and to a franchise attorney if the approval route for alternatives looks like it exists mainly on paper. The royalty is the fee you'll quote when someone asks what the franchise costs. The supply chain is often where you'll actually feel it.