Beyond the Binder: Item 8
🔎 Beyond the Binder: Understanding Item 8 – Restrictions on Sources
In franchising, freedom often comes at a cost, and that’s never more evident than in Item 8 of the Franchise Disclosure Document (FDD).
Item 8 discloses whether you, the franchisee, are restricted in where you can purchase goods, services, or equipment necessary to operate the business. If you’ve ever heard the phrase “captive buyer,” this is where it becomes relevant.
What Must Be Disclosed
Under the Franchise Rule, franchisors are required to disclose:
Whether franchisees are required to purchase or lease products, services, or equipment from the franchisor, affiliates, or designated suppliers
If so, the reasons for these restrictions (e.g., quality control, uniformity, or revenue generation)
Whether the franchisor derives revenue or rebates from these required purchases
The estimated dollar amount or percentage of total purchases subject to these restrictions
How suppliers are approved and whether franchisees can submit new vendors for approval
Any negotiated rebates or supplier payments the franchisor received in the past fiscal year
These disclosures are designed to shine a light on hidden profit centers, because for some franchisors, the real money isn’t made on royalties, it’s made on markups and mandatory sourcing.
Why It Matters
Franchisees often assume they’ll have the ability to shop around and control costs. But in many systems, you’re contractually locked into:
Overpriced or low-quality ingredients and inventory
Technology platforms with inflated monthly fees
Buildout materials from “approved vendors” with narrow options and long lead times
Equipment with warranties voided if purchased elsewhere
Worse, you may be paying higher prices just so the franchisor can collect kickbacks, rebates that aren’t always passed back to you or even disclosed unless you ask the right questions.
When franchisees are required to buy from affiliated suppliers or handpicked vendors, it creates a conflict of interest. The franchisor has the power to dictate terms and pricing without being accountable to market forces and your profitability takes the hit.
🔎 Backstory: Want to see what it looks like when a franchisor builds a business model around extracting profit from its franchisees at every turn? The I Heart Mac & Cheese Item 8 backstory reveals just how far a system can go when supply chains are controlled, incentives are misdirected, and transparency is abandoned. Read the full breakdown.
Real Due Diligence Tips
Request actual invoices from current franchisees to compare required supplier pricing to market rates.
Ask existing franchisees if they were allowed to source alternatives and what the approval process was like.
Look for “Affiliated Party” red flags, companies owned by the same people behind the franchisor may be hidden in Item 8 or Item 21.
Watch for vague language like “may derive income” or “has the right to designate suppliers” this often means they already do.
Ask if franchisees are receiving volume discounts or rebate sharing. If not, who’s keeping the money?
🚨 The Bottom Line
Item 8 tells you who really controls your costs, and your margins. If a franchisor makes more money when you spend more, that’s a fundamental misalignment of interests.
Before you sign, make sure you know:
Who you’re buying from
What you’re paying
And who’s profiting from it
Because if your success depends on managing costs, but your franchisor’s model depends on inflating them, you’re not a business owner. You’re just a customer with a contract.
Stay Tuned: Item 9 - Franchisee’s Obligations is coming soon.
