Franchise Lawyers in Germany

Many business founders decide to join a franchise system because of the reduced risks involved in setting up a business. This business model allows the franchisee access to an already functioning and successful marketing and sales system that impresses with reliable comparative figures and coherent concepts.

For the founder of a franchise system, the rapid expansion of a business is particularly attractive despite little entrepreneurial responsibility for the individual locations. If this business model is successful, passive income opportunities can be generated from entry and ongoing fees. At the same time, the company continues to grow by selling the usage and licence rights to other franchisees. In return, the franchisor supports its franchisees by passing on fundamental know-how and providing regular training and further education.

As a framework supply contract, the franchise agreement contains fundamental provisions for the following contracts covering all the rights that the franchisor grants to the franchisee, including:

• the company name,
• the technical equipment,
• information on bulk purchases,
• guidelines for ensuring a uniform external presentation.

It provides the basis for subsequent distribution agreements and warehousing contracts. The franchise agreement contract design often proves to be highly complex from a legal point of view due to its overlap with general corporate law, copyright law, trademark law, commercial law, and product distribution provisions. Our German contract lawyers will happily assist you in drafting a franchise agreement that considers industry-specific features.

To ensure that the expansion of one or more businesses into a franchise is successful, a pilot business – or even better, several pilot businesses – should undergo a test run. This step ensures the business model can be standardised to reliably generate income at various locations under local competitive conditions. A strategy for developing the future franchise system is first developed and described in detail in the franchise manual to accomplish this. In this context, operational processes must be perfected, and a brand must be created and widely advertised. These contents must be recorded in a franchise manual as a guideline. The minimum content should include a complete description of the business model, market analyses, target groups and unique selling points, as well as the goals and vision of the franchise company.

Franchisors in Germany are advised to provide a carefully prepared and comprehensible franchise manual to keep subsequent business expenses to a minimum—whether for training a new franchisee or subsequent checks. In this context, providing binding guidelines and easy-to-understand recommendations is essential. However, these must not be so extensive that they unduly restrict the franchisee’s entrepreneurial freedom. Otherwise, there is a risk of the franchisee being classified as an employee or employee-like person, which has implications for the franchisor concerning the franchisee’s statutory pension insurance and social security obligations.

Liability issues in connection with the franchise system in Germany are characterised by considerable complexity since the relevant principles are based on the applicable law on the one hand and current case law on the other. Thus, the parties concluding the contract can render themselves liable even before it is signed. It is advisable to contact a lawyer specialising in franchise and contract law to be legally secure in this context.

In the internal relationship between the franchisor and franchisee in Germany, a liability case may arise from the breach of the pre-contractual duty of disclosure: If the franchisor does not wholly or correctly inform the franchisee about the profitability of the franchise system and the franchisee suffers damage as a result of a wrong decision, the former can be liable for damages.

Similar duties of care and information may apply to the manual to be disclosed by the franchisor. However, the extent of this duty depends on the individual case. Thus, the duty to provide information may also include statements regarding the following aspects:

• the economic development of the franchise system,
• the number of existing franchises and company-owned outlets,
• the scope of the commercial property rights, in particular the trademark rights,
• the scope of the services to be provided by the franchisor,
• the work to be performed by the franchisee, the necessary qualifications and the capital requirements,
• the location analysis,
• testing of the franchise system in existing franchise operations,
• existing court rulings and pending proceedings, and
• potential liability risks.

As part of the pre-contractual duty of disclosure, the franchisee is obliged to inform the franchisor about their circumstances correctly and comprehensively. If the conclusion of the contract is recognisably dependent on certain conditions being met by the franchisee, and if the information provided in this regard proves to be false, the franchisee is liable for any damages incurred.

During contract negotiations, it is advisable to document in writing what information has been exchanged as part of the pre-contractual clarification to protect your legal position. This step can be achieved by signing a mutual declaration.