How companies can successfully expand their franchise to Germany

Firms that have been successful in expanding in their home country often want to expand abroad as well. A promising area for expansion is Germany. But to be successful, obstacles must first be overcome. The challenges posed by German law and contract practices keep many from expanding to Germany. Even though, the opportunities outweigh the difficulties.

An overview of the German franchise economy

Unless they happen to live behind the moon, most people are familiar with the fact that franchising is a popular business model in Germany. According to the German Franchise Association, last year, around 141,800 franchise partners and about 181,000 franchise operations were counted in the franchise market. The total turnover of the franchise sector reached around 136bn euros–the range of existing franchise systems could hardly be wider.

Whether retail, fast food or hotel business: there is something for every field of interest. It is therefore no surprise that more and more companies are looking to expand to Germany, even though the path may seem impassable at first glance due to all the stumbling blocks.

Of course, some hurdles have to be overcome first, but franchise systems are designed for growth. This means dealing with foreign laws and contractual challenges from time to time.

The opportunities outweigh the difficulties when franchisors dare to take the step. Germany is a very attractive location—despite our glaring lack of humor, which we are justifiably accused of abroad (just take a look at all the german memes that were en vogue a few years ago).

Individual considerations in expansion

Many franchises in Germany have foreign origins. National borders shouldn’t limit the growth of franchise systems–instead, it should call to open up foreign markets. This has been clearly shown by such well-known brands as Burger King, McDonald’s and Pizza Hut. But franchising is not only a popular strategy for expanding in the restaurant trade: Retail, the hotel industry and the real estate trade have also long since discovered the potential that lies in franchising.

It’s no wonder that the number of franchises in Germany is growing virtually without interruption. Franchisees who want to succeed in Germany should not take chances. It is not a matter of luck that the above-mentioned businesses are so popular. Behind the enormous popularity are careful analyses, a well-thought-out strategy and individual considerations.

Not every product and service that is successful in one country can automatically be established on the German market. For example, cultural differences can determine the success or failure of a franchise. It may therefore be worth adapting the offering to the individual requirements of the target market—depending on the type of product or service. It is important for franchisors to be aware of this fact before embarking on the journey abroad.

Franchisors have these two options

To build their franchise system in Germany, foreign franchisors can use a variety of methods. The potential they can exploit by taking this step is immense. There are two options: awarding a master franchise or finding a franchise license seller. In any case, as in any area of life, the same applies here: It’s best to find a partner you can always rely on when in doubt.

As Jang Deok-su says so well in the Netflix hit series “Squid Game,” “It doesn’t matter how tough you are, you’re not going to win in this place. Not on your own.”

Awarding a master franchise

The simplest way to expand into Germany as a franchise system is to award a master franchise. In master franchising, a larger region or an entire country is assigned to a so-called master franchise partner for development. In this case, a master license is granted, which allows the master franchise partner to develop its own franchise system. The master franchise partner then acts as the franchisor of the brand in the region or the entire country.

In concrete terms, the foreign franchisor looks for someone in Germany who buys a so-called master license. As a result, he is responsible as franchisor in, for example, eastern, southern, northern or western Germany, or alternatively in the whole of Germany.

In other words, he is the head of the entire development project in the region that has been assigned to him. Franchise partners then conclude their contracts not with the foreign franchisor, but with the master franchise partner. So-called development contracts also come into play, which contain certain target agreements—for example, that the master franchise partner commits to finding so-and-so many franchise partners in such-and-such a time.

This gives the franchisor a certain degree of security. Sounds complicated? It is, especially since we are talking about a lot of money. But for the foreign franchisor, awarding a master franchise has advantages: The fact that the master franchise partner assumes a large part of the expansion costs means that the company’s own financial risk can be kept relatively low.

Adaptation to the market can take place much more quickly than if foreign franchisors attempt to establish their franchise system in Germany on their own. It is important that the master franchise partner has sufficient business knowledge and knows the local market well.

That means it makes sense to choose a master franchise partner who is from Germany himself because that way he will be able to understand the local conditions. This is vital because the two partners have to adapt the business concept to the market together.

In addition to regional know-how, management experience and franchising expertise are helpful. Suitable master franchise partners therefore come from the management sector.

Search for a franchise license buyer

Smaller franchise systems from European countries also like to look for a developer, a so-called franchise license buyer or an expansion manager on site. This person is then employed by the foreign franchisor while recruiting franchise partners for the company here in Germany.

In this case, the franchise partners conclude the agreement with the foreign franchisor, unlike in the master model. This is disadvantageous because legal matters are settled in Germany, not abroad. This can be a real challenge, especially for German franchise partners, who in most cases do not speak the language of their franchisor. In addition, the use of a developer, franchise license buyer or expansion manager can slow down the speed of expansion.

This is due to the legal issues that prospective franchise partners face with the decisions to sign a franchise agreement. In comparison, the master model is faster, more transparent and more accommodating because the contracts are concluded under German law. It should also be clear that entrepreneurs will not get very far either way without patience and persistence.

Of course, this is also true in the franchise sector. That perseverance is THE factor that distinguishes successful from unsuccessful entrepreneurs was already known to Steve Jobs. Another advantage of the method is that it starts right away, without having to spend months setting up structures first—perfect for all lovers of the hands-on mentality.

German legislation in the franchise sector

Who would have thought: Of course, there are rules in Germany that have to be obeyed. At least, that’s how the rest of the world imagines it. And if we are being completely honest: It’s true that we place a lot of value on rules. Just like Monica from the hit HBO series “Friends” says: “Guys, rules are good! Rules help control the fun!”

It probably comes as a surprise to one or the other reader that franchising is not explicitly regulated in Germany, unlike in Belgium, Italy, Sweden or France. In fact, there is no franchise law in the entire German-speaking region that plays a binding role for German courts!

Many regulations have to be observed in this country, including antitrust law, competition law and commercial agency law, which of course makes things very complicated. No wonder that the need for a separate German franchise law is discussed again and again. However, there is a code of conduct for franchising that has been drawn up by the EU Commission.

The guidelines it contains give at least some indication of what a coherent franchise agreement should contain. For example, all rights and obligations must follow directly from the clauses contained therein. Thus franchise agreements are very extensive in most cases.

Jana Jabs is an expert on the German franchise market and the Founder of Die FranchiseMacher, a consulting firm for franchisors.