Franchising Law

You can save yourself many of the problems and risks involved in starting a business on your own if you buy an “already-made” concept or offer such a concept as a franchisor. The system is called franchising and is practiced today in many industries.

Franchising generally offers you three possibilities:

  1. As a franchisee, you take over the business idea of a franchisor, get trained and receive regular support. Your entrepreneurial possibilities are within a fixed framework.
  2. On the other hand, as a franchisor, you develop your own franchise system. The basis is your business idea, which has been already tested in practice. If the idea has been proven to be successfull, the franchise system will help you to expand quickly through motivated co-entrepreneurs (franchisees).
  3. As a “master” franchisor, you will receive the license of a foreign franchise company that wants to establish itself on the German Market. This allows you to act as a franchisor in a specific region or throughout Germany in order to acquire further franchisees on your own account.

How does a franchising works?

In the franchising process, a company – the franchisor – provides name, brand, know-how and marketing. For a particular fee, the franchisor grants the franchisee the right to sell his goods and services.

In return, this, guarantees that no other franchisee will open a business in his territory. The franchisor provides important prerequisites such as market tests or calculation aids and offers ongoing business support, advice, advertising and training. Although your freedom of decision is limited by the franchise contract, the franchisor offers a kind of safety net.

The complete business concept is generally made available to franchisees in a manual.

Advantages of franchising

The franchisee can take over the know-how and experience of the system provider (franchisor). This means: The risks of starting a new business concept that does not promise much success and that high investments “are going to be wasted” is really low. In addition, the franchisee receives additional support from the franchisor for business practice: business and technical training, cost sharing, marketing projects etc.

Disadvantages of franchising

A franchise system defines the entrepreneurial “march route” very precisely. This means: the path to professional independence is relatively fixed and can hardly be influenced. That may not be enough for some founders of a new business.

Master-Franchise: International Franchise

Foreign franchise companies that would like to establish themselves on the German market, but lack the necessary cultural knowledge or the personnel and financial possibilities, often try to offer a so-called “Master Franchise”: The master franchisee receives a licence for an existing franchise system, whereby they do not become active directly as a franchisee, but must endeavour to acquire further franchisees in a certain area (e.g. Germany). This should be done in their own name and account. Please note that:

  • The franchise concept is suitable for the target area (infrastructure, industry structure, customer mentality, political and legal situation);
  • The contract is negotiated in detail and your capital situation is also taken into account;
  • The contract shall be converted into German Law;
  • The franchise system may have to be be (slightly) changed in order to be transfered into German Market;
  • The name shall be sufficiently legally protected and shall not have any other negative meaning in your own national language;
  • You shall be familiar with the industry and with the language of the target country;
  • The financial conditions are fairly negotiated for both parties;
  • You will have to invest in the (generally high) costs for the license acquisition and the start-ups costs at the beginning;
  • The contract period is recognized as sufficient for both parties and an extension option will be agreed;
  • The system provider shall have a good reputation and shall be considered as reliable.

When talking about franchising, it is important to also consider the 5 most common risks you could step on:

  1. Novelty: Be careful with franchise-systems that have only been on the market for a short time! The concept cannot be tested in a short period of time. The danger of failure is high.
  2. No Pilot Projects: Be careful if the franchisor refuses to name at least two pilot projects and to reveal the economic key data! Do not sign without having had an insight into the world of numbers!
  3. No References: Hands off, if the franchisor is not willing to give you references! You should ask several franchisees of your choice about their experiences.
  4. No Franchise Manual: Let it go, if there is no franchise manual! A few checklists are enough to document a business idea completely. Serious franchisors have that.
  5. Time Pressure: Take your time! Never let yourself be pressured! Never sign a contract without having carefully checked the contract and the commercial documents (with an expert consultant)!