When a company has achieved almost everything there is to achieve in its home country, the next step is usually to expand abroad—a popular destination is Germany. As the fourth-largest economic power in the world, Germany offers franchise companies from all sectors an extremely lucrative market for their products and services. However, establishing a franchise in Germany is not free of pitfalls.
“Some things that are easily possible in other countries do not work in Germany,” explains Jana Jabs, the founder of the consulting firm ‘Die FranchiseMacher supports entrepreneurs in setting up German franchise networks. “If an entrepreneur wants to take advantage of the good opportunities the German market offers, he has to adapt his approach to the local market conditions.”
In the following, the expert for franchise development examines the features of the German market and gives tips on how franchise companies can establish themselves in Germany.
Germany as a sales market – lucrative but treacherous
Many of the problems encountered by foreign franchise companies in Germany are primarily due to a lack of understanding of the local situation. Entrepreneurs who try to gain a foothold in Germany from abroad often underestimate the size of the country and its regional diversity. The expansion is almost doomed to fail if there are also problems with German laws.
If a company wants to open franchise branches in Germany, it should under no circumstances do so without reliable partners in the country itself, who will steer the brand’s fortunes locally. These partners should be thoroughly familiar with the German market and able to mediate between the interests of the foreign franchisor and the needs of the franchisee in Germany.
Understand and plan for regional differences
On the one hand, it should be noted that Germany is not only one of the largest and most populous countries in Europe, but also one of the most diverse among them. More than 30 years after reunification, economic and cultural differences between East and West Germany can still be seen.
Meanwhile, some parts of Germany are characterized by cultural peculiarities and sensibilities that do not exist in the rest of the Federal Republic. This makes it difficult to view Germany as a homogeneous whole when it comes to franchise development. For example, what works in northern Germany does not necessarily have to be successful in Bavaria.
These regional differences must be considered when planning the expansion to expand successfully. Therefore, it may make sense to have different regions of Germany processed by different partners. It is of immense advantage if these partners themselves come from the respective region and are already familiar with their culture and sensibilities.
Stumbling blocks in franchise law—that’s why a German franchise lawyer is so important
The second big trap that awaits entrepreneurs hoping for great success in Germany is franchise law. Since German law does not treat franchise activities as a separate legal sphere, the situation can quickly become complicated for international franchise companies. Unlike in France, for example, where there is already a combined franchise law, franchise systems in Germany are subject to various legal provisions.
In addition to commercial, civil, and antitrust law, these are made up of various sector-specific legal spheres whose legal norms overlap in some areas. For this reason, franchise contracts fall under the type of combination contracts that are subject to more than one jurisdiction. Due to the language and legal barriers, it is often more difficult for foreign companies to formulate these correctly than it would be the case with normal franchise agreements.
An experienced franchise lawyer from Germany is therefore essential for successful expansion on the German market. By working out contracts from the outset with a lawyer who specializes in German franchise law, international companies can avoid inconsistencies arising later. Should there be a legal dispute with individual franchisees, the franchisor is on the safe side with effective, seamless contracts.
Do not tackle franchise development in Germany from the outside—but from the inside
In addition, as much of the franchise development as possible should be carried out by German staff and in Germany. In contrast to franchise development across national borders, competent local partners ensure that special circumstances in the German market are appropriately incorporated into the strategic planning. This makes it possible to spread the brand faster and more crisis-proof in Germany.
In particular, larger franchise companies from non-EU countries often rely on selling master licenses to German entrepreneurs. These allow a master franchisee to open their own branches under the franchisor’s brand and sell sublicenses to other franchisees on their own initiative. The responsibility for setting up a franchise network in Germany lies almost entirely with the master franchisee or master franchisees.
This makes it easier to gain a foothold in the German market. Since a German company concludes the other franchise agreements and grants sublicenses, neither national borders nor language barriers stand in the way of contract negotiations. In addition, this approach offers the advantage that the sublicensing of the brand to individual franchisees take place exclusively under German law. This accelerates the growth of the German franchise network in the long term and makes it easier to secure it contractually.
You can only drive safely if you create clear conditions
However, building a franchise through a master franchise structure also has inherent disadvantages. Since the master license grants the German master franchise company great freedom of action, the owner strongly influences how the brand develops in Germany. As a direct contact and intermediary for the franchisor and the individual German franchisees, he is also in a position from which he can only be removed with difficulty.
If problems arise, this often leads to severe setbacks in franchise development. However, these can be circumvented if the franchisor specifies clear conditions for the master franchise partner in a target agreement.
First and foremost, realistic criteria for successful expansion should be defined based on measurable indicators such as the number of sublicenses sold or the number of successfully established branches. This, along with financial incentives for success and a clause allowing the franchisor to withdraw if conditions are not met, provides a solid basis for cooperation.
Licenses in direct sales—this is how franchise companies skip the middleman.
If a master franchise license is not an option, the alternative is to sell licenses directly to individual entrepreneurs in Germany. This variant of network structure is particularly popular among smaller companies from other EU countries, as it enables a large degree of direct control. Furthermore, when selling licenses directly, it is not necessary to first find a master franchise partner and set up his company as a master company. The associated time and cost savings make it possible to gain a foothold in the German sales market more quickly and to operate profitably.
In this model, the counterpart to the master franchisee is the developer or expansion manager. The parent company gives him power of attorney to negotiate license agreements with potential franchisees independently. Since this person is an employee of the franchisor, the group has greater leverage to issue instructions and directly influence the development of the franchise. At the same time, the network always remains under the franchisor’s control, without having to go through a middleman in the form of the master franchise partner.
Conversely, it is a problem for some entrepreneurs in Germany to conclude contracts with a company that has its place of jurisdiction abroad. Since a foreign court would have jurisdiction in a legal dispute, security-oriented entrepreneurs fear being disadvantaged due to the language barrier and differences in legal opinions. As a result, a company’s German franchise network grows more slowly if it sells licenses directly.
Start well-prepared on the German market
As long as entering the German market is done with the help of a suitable strategy, it is definitely worth it. In this respect, it hardly matters whether a franchise company entrusts a master franchisee or an expansion manager tasked with building up a franchise network in Germany. In fact, the advantages and disadvantages of both models are balanced: While a master franchise expands faster and requires less input from the franchisor, building a franchise through an expansion manager is more cost-effective and allows direct control.
Which model is suitable for a company’s goals is a highly individual question that must be clarified using market and needs analyses. For this purpose, it is recommended to consult a franchise consultant draw. Such agencies have their own networks in Germany and can therefore provide advice and support to ensure that the establishment of franchise structures in the country runs smoothly.
About Jana Jabs
Jana Jabs is a franchise expert who has been helping companies build their franchise system for over ten years. As a franchise consultant, she helps entrepreneurs build a sustainable franchise system and digitally map their business knowledge as a manual, making it available to all employees. For more information, visit: https://www.franchisemacher.de/