German Franchising Law – Setting up and Running Franchising Systems in Germany
Franchising is a complex partnership: In return for the provision of a – usually – profitable business concept, know-how, licenses, trademark rights and promotion in another form by the franchisor, the franchisee agrees to pay an “entry fee” for the Access to the franchise system in order to pay a certain percentage of its sales to the franchisor. Well-designed and functioning franchise systems work to the advantage of both parties: The franchisee receives access to an established and functioning business model with well-known brands, reference channels and carefully developed business functions and processes. The franchisor, on the other hand, can increase its market presence without significant investments of its own and with only a low level of risk, since the franchisee as an independent entrepreneur bears his own operational and business risk.
In this consulting practice for franchisees and franchisors on issues relating to franchise law, we give special attention to:
- Setting up a business in the franchise sector in Germany: Advice and legal support for prospective franchisees before entering or setting up a franchise system in Germany;
- Franchise agreements: review of franchise agreements and side agreements;
- Holistic support for young and established franchise systems;
- Pre-contractual disclosure obligations: scope of pre-contractual disclosure and information obligations of the franchisor before entering a franchise system, purchase obligations, competition agreements in franchise contracts;
- Service disruptions and conflict resolution: While certain conflicts in a franchise relationship can often only be resolved through legal proceedings, other disputes between the franchise partners can sometimes be resolved more quickly and cost effectively through alternative dispute resolution mechanisms (ADR), such as mediation or arbitration. There are particularly frequent situations in which a franchisee wants to leave the franchise system prematurely. The reasons for this are varied and not always based on the franchise system. A lack of economic success, health concerns or the desire for personal or professional changes can be understandable reasons for premature termination of the franchise agreement. These cases are legally problematic, as the franchise contract is usually designed for a fixed contract period and cannot easily be terminated early. In these cases, in addition to the contractually fixed conditions for an orderly and, if necessary, extraordinary termination of the franchise agreement, there is always the possibility of finding a solution through negotiation.
- Protection against competition and non-competition provisions in franchise law: Non-competition provisions and agreements on protection against competition in the franchise sector have a naturally restrictive effect on competition and must therefore always be questioned critically. Due to their potentially restrictive effect on the economic ability to act, certain legal requirements must be placed on the effectiveness of non-compete obligations in the franchise agreement.
- Confidentiality: Protection of intangible legal assets in franchise relationships by means of confidentiality agreements, including post-contractual confidentiality obligations.
Typical conflicts in Franchising Law
Conflicts in franchise law often arise from the same typical reasons. On the side of the franchisor:
- The franchise system does not work or is based on an unsustainable or insufficiently viable business model
- Insufficient documentation of the franchise system; The franchisor’s know-how is inaccessible to the franchisee or does not have the promised added value
- Strict purchase and purchase obligations, which permanently hinder the operational business of the franchisee
- Value-added services by the franchisor do not work or do not work as agreed. Often these are technical services, such as IT services, the failure of which has serious consequences for the operational business of the franchisee. From a legal perspective, technical value-added services depend on the specific contractual structure
- Pre-contractual misconduct, in particular insufficient information and clarification on the franchise system and the risks of self-employment;
- Inadequate care and support for franchisees
On the side of the franchisee:
- Bad business decisions by the franchisee. The choice of location in particular is always problematic
- Insufficient capital resources to cover the standard of living in the start-up and establishment phase
- Inadequate pre-contractual advice on legal and tax matters;
- Incorrect ideas about the depth of attachment and integration;
- Personal strokes of fate, such as illness and incapacity for work