Franchise Agreements in Germany

Regardless of the specific characteristics of individual franchises, the franchisor is typically responsible for granting the necessary licenses, usage rights, and know-how through the franchise agreement. These details are often outlined in a separate franchise handbook. Additionally, franchisors usually provide ongoing support to franchisees, such as training and education, to facilitate smooth business operations. In return, franchisees are required to pay an initial entry fee and ongoing fees for this support while adhering to the franchisor’s often strict specifications regarding business management and the marketing of goods or services. Engaging a German corporate lawyer is highly beneficial for securing franchise agreements and effectively balancing the potentially conflicting interests of both parties.

Certain clauses, such as purchase commitments, minimum turnover requirements, and post-contractual non-competition obligations, can significantly restrict the entrepreneurial freedom of the franchisee—sometimes to an inappropriate degree. Individual clauses or even the entire agreement may be rendered invalid in such cases. Franchise agreements in Germany must include precise and clear provisions to prevent legal ambiguities, particularly concerning liability for breaches of contractual obligations. These provisions can consist of contractual penalties, damages, compensation payments, and extraordinary termination rights for significant breaches, ensuring robust protection for both parties in the event of a dispute.

Before joining a franchise system, the franchisee must be able to assess their profit potential based on sufficient and reliable information. Consequently, the franchisor is obligated to provide comprehensive details about the franchise during contract negotiations. This includes information about the profitability of the franchise system, location-specific profit prospects, and realistic profit expectations. Failure to disclose such information can result in liability for damages. Non-disclosure agreements are commonly employed to safeguard this sensitive data during negotiations.

The extent of the franchisor’s duty to disclose information varies depending on the individual case, particularly considering the professional experience of the potential franchisee. For instance, an inexperienced entrepreneur requires more detailed information about forecasts and risks than a business-savvy prospective franchisee. Neglecting this obligation may lead to significant compensation claims. Non-disclosure agreements in Germany effectively protect confidential information, even when the prospective franchisee is classified as a consumer before joining the franchise system. They retain the right to revoke the contract after its conclusion.

The franchisee is required to adhere strictly to the specifications outlined in the franchise handbook. This handbook serves as the primary repository of the franchisor’s expertise and guidance for managing the franchisee’s individual business operations. The handbook must be provided to the franchisee well in advance to ensure suitable preparation – typically at least 14 days prior to signing the franchise agreement. While the franchise agreement itself often outlines the parties’ rights and obligations in broad terms, the handbook offers a detailed and practical guide to the franchise system.

The franchise handbook is an essential resource for successful integration into the franchise system and typically includes the following:

• The business model,
• Market analyses,
• Target groups and unique selling points, and
• The objectives and vision of the franchise system.

Beyond serving as a guide, the franchise handbook acts as a reference manual, a knowledge database for the franchisee, and potential evidence in legal disputes. It should include appendices such as checklists and information sheets for practical use. Although these extensive requirements may limit the franchisee’s entrepreneurial freedom, they provide a structured framework that significantly reduces the risks associated with establishing a new business.

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Most franchise agreements in Germany are typically concluded for a fixed term of 5 or 10 years and often include extension clauses. For the sake of planning security, ordinary termination is usually excluded. Instead, franchise relationships may be terminated through a cancellation agreement, which includes detailed provisions for ending the business relationship or by extraordinary termination for good cause. Extraordinary termination is reserved for situations where it is unreasonable to expect the continuation of the contractual relationship until the agreed term ends.

On the franchisor’s side, grounds for extraordinary termination may include:

• Unauthorised competitive activities by the franchisee,
• Reporting inaccurate sales figures (leading to underpayment of fees) or
• Failure to pay fees or repeated late payments.

For the franchisee, potential justifications for extraordinary termination may involve:

• Non-compliance with delivery obligations, such as the repeated supply of defective goods,
• Misrepresentation of the profitability of the franchise system or location or
• Imminent financial insolvency if the business continues until the end of the contract term.

To minimise the risk of damage claims in cases where extraordinary termination is later deemed invalid, all grounds for termination should be carefully reviewed and substantiated in advance.

Even if the franchise agreement in Germany is terminated by mutual agreement, both parties have post-contractual obligations after the end of the contract term – often in the form of non-compete clauses. A conditional non-compete clause is stipulated for the former franchisee to safeguard the franchise system’s expertise and prevent attacks on the franchise. To be legally effective, this must be limited to one year, be specific in content, and include compensation for non-competition.

Against the background of the franchisee’s legal independence, it is up to the franchisee to choose the legal form to establish the company. Whether the company should be organised as a sole proprietorship, partnership or corporation, therefore, depends primarily on the content of your company, capital requirements, liability and tax aspects. However, the franchisor can make specifications in the franchise agreement regarding the choice of law, which must always be considered when setting up the company.