Franchising in Germany...Franchising in Germany 4 Chicago New York San Francisco Toronto Washington...
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Franchising in Germany
Heiko Stumpf
Manager Investor Support Service
Germany Trade & Invest
Winter/Spring 2011
www.gtai.com 2Franchising in GermanyFebruary 2, 2011
I. About Germany Trade & Invest
II. Introduction to Franchising
III. How to start a Franchise System in Germany
IV. The Franchise Contract
V. Links and Contacts
www.gtai.com
The Agency
3Franchising in GermanyFebruary 2, 2011
Germany Trade & Invest is the foreign trade and inward investment promotion agency of
the Federal Republic of Germany.
The Federal Ministry of Economics and Technology is our shareholder. The agency is also
funded by the Federal Ministry of Transport, Building and Urban Affairs.
Germany Trade & Invest…
supports export-oriented companies based in Germany with comprehensive foreign market information.
promotes Germany abroad as a high-performance economic and technology location in order to attract investors who create/secure jobs in Germany.
consults potential foreign investors in terms of their settlement plans and realizes the required project management support in Germany.
An additional special focal point of activity lies in promoting the economic development of
the new federal states including Berlin.
www.gtai.com 4Franchising in Germany
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The Agency
Two headquarters in Germany - 46 locations worldwide.
February 2, 2011
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Germany Trade & Invest concentrates its market competencies within a
range of industries
Picture Credit: Helmholtz Centre Berlin for Materials and Energy; BMVBS/Amin Akhtar; Copyright Dreadlock/Fotolia; BMU/Rupert Oberhäuser, BSW/Paul Langrock;
BMU/Brigitte Hiss; Bundesverband Windenergie e.V; Copyright BMU / Bernd Müller
Our Teams
February 2, 2011 5Franchising in Germany
Renewable Energies & Resources
- Photovoltaics
- Energy Efficiency
- Renewable Resources and Bioenergy
- Energy Storage and Fuel Cells
- Solar Thermal Energy
- Geothermal Energy
- Wind Energy
- Waste to Energy, Recycling and SustainableWater Resource Management
Chemicals & Healthcare
- Chemical Industry and Polymers
- Chemicals-Related Process Industry
- New Materials/ Composite Materials
- Red Biotech
- Medical Devices Industry
- Pharmaceuticals Industry
Service Industries
- Consumer Goods/Retail/Franchising
- Food and Beverages
- Information and Communications Technology
- Business Services
- Transportation and Logistics
- Tourism
Mechanical & Electronic Technologies
- Electronics and Microtechnology
- Machinery and Equipment
- Transportation and Technologies
- Applied Sciences and Technology Transfer
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Project Management Assistance
Location Consulting/Site Evaluation
Project partneridentificationand contact
Business opportunityanalysis and market
research
Market entrystrategysupport
Joint project management with regional development
agency
Coordination and support of
negotiations with local authorities
Final sitedecisionsupport
Site preselection
Identification of project-specific location factors
Cost factoranalysis
Site visitorganization
Organization ofmeetings withlegal advisorsand financial
partners
Identification of relevant tax and legal issues
Project-relatedfinancing and
incentivesconsultancy
Administrative affairs support
Accompanyingincentives
application andestablishment
formalities
Decision & InvestmentEvaluationStrategy
Support Services
Complete your project management needs from our range of investment
and one-stop project consultancy services
Our Investment Project Consultancy Services
6Franchising in GermanyFebruary 2, 2011
www.gtai.com 7Franchising in GermanyFebruary 2, 2011
I. About Germany Trade & Invest
II. Introduction to Franchising
III. How to start a Franchise System in Germany
IV. The Franchise Contract
V. Links and Contacts
www.gtai.com
…a system of marketing goods and/or services and/or technology, whichis based upon a close and ongoing collaboration between legally andfinancially separate and independent undertakings, the Franchisor and itsindividual Franchisees, whereby the Franchisor grants its individualFranchisee the right, and imposes the obligation, to conduct a business inaccordance with the Franchisor's concept.
The right entitles and compels the individual Franchisee, in exchange fora direct or indirect financial consideration, to use the Franchisor's tradename, and/or trade mark and /or service mark, know-how, business andtechnical methods, procedural system, and other industrial and /orintellectual property rights, supported by continuing provision ofcommercial and technical assistance, within the framework and for theterm of a written franchise agreement, concluded between parties for
this purpose.
According to the European Franchise Federation franchising is defined as:
Definition
February 2, 2011 8Franchising in Germany
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The franchisor and franchisee play different, but complementary roles:
Franchisor and Franchisee
February 2, 2011 9Franchising in Germany
Franchisor
• Grants right of use of trademarks and „Know-how“ (non-patented practical information, resulting from experience and testing, which is secret, substantial and identified)
• Consecutive supply with goods
• Other support (i.e. training) and assistance
• Develops the business’s concept to ensure credibility and quality of the brand (i.e. through advertising)
Franchisee
• Payment of entry fee and royalty and/or a combination of fees and adherence to the franchisors guidelines, especially to the common identity
• Acceptance of supplied goods
• Participation in the support activities and development of the business
• Owns his franchised business and is legally and financially independent of the franchisor
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3741
4744
48
70
0
10
20
30
40
50
60
70
80
2006 2007 2008 2009 2010 2015
The German Franchise-Industry is growing significantly
Sources: German Franchise Association, 2011; Deutsche Bank Research, 2009
The German Franchise Industry - Overview
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Sales of the German franchise industry(in EUR billion)
Within the last ten years, the sector managed to double its sales from EUR 22 billion to EUR 48 billion in 2010.
Sales are expected to keep up strong growth, reaching an estimated EUR 70 billion by 2015.
Distribution of franchising by sector(in %, 2009)
The service sector is dominating the German Franchise-industry with a market share of more than 40.0%, followed by retail with almost 23.0%.
The service sector is an important growth driver; however, other sectors mainly in restaurant and catering have expanded considerably.
41.2%
22.5%
13.5%
4.1%
5.4%
7.3%
6.0%
Services
Retail
Hotels/Gastronomy
Tourism/Leisure
Fitness/Health
Handcraft
Others
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Franchising in Germany exhibits a constant upward trend in number of
franchisors and franchisees as well as employees
Source: German Franchise Association, 2011
The German Franchise Industry - Overview
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Franchisors Franchisees Employees in Franchising
1000 franchise systems operate in the German market (+4%).
About 64,000 franchisees take advantage of the growing market.
With 470,000 employees, franchising is an important business sector in Germany.
In 2010, on average each franchise system employed 470 people.
(in 1,000) (in 1,000)
870
900910
950960
1000
800
850
900
950
1000
1050
2005 2006 2007 2008 2009 2010
4851
5557
6164
0
10
20
30
40
50
60
70
2005 2006 2007 2008 2009 2010
421
429
441
450
459
470
390
400
410
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440
450
460
470
480
2005 2006 2007 2008 2009 2010
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There are about 1000 franchising systems active in the German market
Franchise Systems
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1. Development of an entirely new franchise system and finding
local franchisees to buy the developed “business kit”.
2. Master-Franchising: adoption of an established franchise system
to the German market.
To achieve a high reputation the franchise system should fulfill certain minimum requirements set by independent organizations or associations. Especially the form of the franchise contract and the information policy of the franchisor are important criteria. Compliance with those criteria can be proven by:
Becoming a member of the German Franchise Association (Deutscher Franchise-Verband – DFV) which already has about 285 members.
Certifying the system with the Franchisee Association Germany (Deutscher Franchise-Nehmer Verband – DFNV).
Generally two types of market entry exist:
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Master franchising is an effective way to adapt an international system to a
new market because the knowledge of an experienced national partner is
used
Master Franchising
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The master franchisee obtains a license from the franchisor that allows him to establish and run an elsewhere existing franchise system in a country or region in his own name and for his account. Master
franchisee
Franchisee Franchisee Franchisee
Franchisor
The master franchisee accustoms the franchise system to the national market and runs at least one pilot business before establishing the respective system.
The master franchisee assumes the role of the franchisor for the respective territory.
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I. About Germany Trade & Invest
II. Introduction to Franchising
III. How to start a Franchise System in Germany
IV. The Franchise Contract
V. Links and Contacts
14Franchising in GermanyFebruary 2, 2011
www.gtai.com
When establishing a franchise system the following steps should be
taken:
How to start a Franchise System in Germany
February 2, 2011 15Franchising in Germany
Strate-gy
• Design of the system
• Defining the target group
Plan-ning
• Business Plan and calculation base
• Test run
• Financing and Incentives
System setup
• Pilot operation and description of Know-how
• Development of franchise manual and training concept
• Drafting of franchise contract
Expan-sion
• Finding of franchisees
• Master-franchising
Imple-menta-
tion
• Quality management
• Functional franchise management (consecutive trainings and development)
• Central buying structure
The system must be attractive, appear competent and safe
The results of the test run determines the further development
Pilot operations with several franchisees should be carried out to identify remaining weaknesses
Finding of the right franchisees is crucial for the success of the system
Ap
pro
x. 2
-4 y
ea
rs
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A successful franchisor has to maintain a strong and close
relationship to their franchisee, e.g. offer bulk
discounts, sustain a knowledge gap.
Experienced franchisors are examples for new franchisees
and support partners in all aspects of the business.
A stable, preferable, growing market and a long-term commitment is required to ensure
the success of a franchise system.
The competitive strength of a franchise system is, amongst
others, defined by the product/service, market share, image, branding.
Continual target-performance
comparison, quality control and training
measures for franchisees.
Franchisor’s requirement profile determines the availability of potential partners, e.g. industry experts or outsiders.
Success elements have to be defined and stand-ardized to be easily transferred to new franchisees.
Franchise systems require sufficient
funding to finance the start-up and
expansion phase.
Factors determining the success of a franchise system include:
Source: German Franchise Association, 2010
February 2, 2011 16Franchising in Germany
Success factors of
a franchise system
Market potential
Competitive strength
Controlling
Partner potential
Transfer-ability
Know-how
Capital base
Strong relationship
Success Factors
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Adequate franchisees are the most important success factors of the
franchise system besides the product/service itself
Acquisition of Franchisees (I)
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Qualifications: customer orientated, leadership skills, willingness to integrate into the system and undergo further training, teamwork, resilience
Relevant experiences in the filed of franchising
Availability of equity: enough financial funds to cover the first months should be available
Education: knowledge in business administration, especially sales and distribution
Key qualifications to look out for in franchisees include:
Types of franchisees
Start-ups
Existing operators within
the segment (conversion)
Existing operators from other segments (diversification)
Restructuring of an existing outlet
system (reorganization)
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How to find a franchise partner in Germany
Acquisition of Franchisees (II)
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Contract negotiation
First contact/ statement of
interest
Bilateral exchange of information
Interview/ personal meeting
Detailed self-disclosure
If applicable, signing of MoU
or LoI
Inhouse seminar
Signing of franchise contract
Identification of partners
Advertisements Public Relations Direct marketingTrade fairs, business
start-up fairs, chambers of commerce
Business directories, associations
Definition of franchise concept
Strengths over individual foundation Advantages over competitors Market position and prospects
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The franchisor has to conduct a trial with at least one franchise project before
concluding the first franchise contract.
The franchisor has to train the franchisee in the beginning to ensure successful
market entry.
The franchisor must hand a copy of the code of ethics to the franchisee before
concluding the franchise contract.
All important information and documents must be handed to the franchisee in
writing.
The franchise contract must be handed to the franchisee immediately after
signing.
The German Franchise Association provides a code of ethics regarding the
fair treatment of franchisees and franchisors. The most important
provisions are:
Code of Ethics
February 2, 2011 19Franchising in Germany
www.gtai.com 20Franchising in GermanyFebruary 2, 2011
I. About Germany Trade & Invest
II. Introduction to Franchising
III. How to start a Franchise System in Germany
IV. The Franchise Contract
V. Links and Contacts
www.gtai.com
The franchise contract is not explicitly regulated by law. It can be
categorized as a mixed contract
Legal Nature of the Franchise Contract
February 2, 2011 21Franchising in Germany
The franchise contract is closely related to the distribution contract.
In distribution law the following contracts can be distinguished from the lowest to the highest degree of vertical integration.
Supply Contract
Specialty Retailer
Authorized Dealer
Commission Agent
Commercial Agent
Franchise Contract
Franchise contract
Commercial Law
Civil Law (i.e. Sales, Rent, Loan, Consumer Protection)
License and Intellectual Property
Law
Company Law
Employment and Social Insurance
Law
Competition and
Antitrust Law
Case Law
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The duties of the franchisor depend on the structure of the system. Generally the following duties are inherent in most systems:
The duties of the franchisor depend on the structure of the system.
Generally the following duties are inherent in most systems:
Duties of the Franchisor
February 2, 2011 22Franchising in Germany
Duty of the Franchisor Scope of the duty
Transferring right of use of Know-how and intellectual property
The scope can be individually agreed upon. This aspect should be described in much detail in the franchise contract.
Disclosure of information Usually done in the guidelines, the manual and during regular trainings - everything that is important for running the franchised business must be disclosed to the franchisee.
Incorporation in the system
Offering continuous consulting and support to the franchisee even before opening the business.
Facilitation of the business
Especially market observation and development of new products and services in order to keep the system competitive.
Guaranteeing non-competition
The franchisor should provide a geographic sphere of non-competition to protect the franchisee from ruining competition.
Supply products The franchisor has to supply the franchisee with the agreed amount of products.
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The franchisee has to fulfill the obligations of the franchise contract. His
foremost duties include:
Duties of the Franchisee
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Duty of the Franchisee Scope of the duty
Application of the system The franchisee must adhere to the guidelines set out by the franchisor in the manual and participate in trainings.
Business management The franchisee has to set up and run his franchised business for the duration of the franchise contract.
Payment of fees The franchisee has to pay the fees agreed upon.
Duty to disclose
information
All issues relevant to the franchisor have to be reported to
him.
Interest protection Activities undertaken by the franchisee must consider the interests of the franchisor.
Merchandizing The franchisee has to continuously facilitate the sales of the products. Contractually agreements can include: minimum order quantity, obligation to accept products, obligation to present the products in a specific way
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The franchisor has to disclose the calculation base of his franchise system
to enable the franchisee to estimate the profit margin. This includes:
Pre-contractual Duty to Disclose Information
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• Information about the profitability of the franchise system
• Information about already existing franchise businesses
• Clear and comprehensive description of the marketing concept and Know-how
• Amount of capital needed by the franchisee and expected amount of work input
• Expected profits
• Possible dangers
• Kick-backs the franchise system is granted for the turnover of the franchisees
(However, those benefits must not be shared with the franchisees.)
The information provided must be true, accurate and not misleading. It should be based on:
If the duty of disclosure is not complied with the franchisor may be held liable for damages. A protocol about the provided information should be drawn up.
Extensive market analysis data
Data obtained during trials in more than one establishment
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Franchise contracts usually consist of general elements and industry-
specific provisions. The following questions should be addressed:
Content of the Franchise Contract
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The EC Block Exemption for Vertical Agreements Regulation determines the requirements for compatibility of a franchise contract with the EC ban on cartels. It can also be used as a guideline for contract formation.
• Rights and obligations of the franchisor and franchisee
• Goods and services supplied by the franchisor as well as transferred know-how
• Franchisees payment obligations
• Provisions on the use of intellectual property
• Duration of the contract: should be long enough to amortize the initial investment - an initial duration of 10 years is common.
• Conditions under which the contract can be renewed or terminated
• Conditions under which the franchisee can sell the franchised business
• Right of the franchisor to develop the system
• Provisions about the immediate return of the possessions of the franchisor upon termination of the contract and if applicable compensation of the franchisee.
• Control Rights: guidelines on the degree the franchisee is bound to the business concept should be handed to him.
• Possibly: exclusivity of trading, non-competition clauses, contract penalties.
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The nature as mixed contract demands much care when drafting the
contract. Especially the following areas have to be regarded:
Contract drafting: Influence of Other Areas of Law
February 2, 2011 26Franchising in Germany
•Non-competition clauses may only concern the franchise products and the respective area, may not exceed one year and must grant compensation.
Commercial law
•Clauses that may disadvantage the franchisee unduly are subject to review.
•Especially concerned are minimum turnover, alteration, duration and termination clauses as well as warranty disclaimers.
Civil law
•Franchisee that are not already entrepreneurs may have rights to withdrawal.
•The franchisor may be obliged to inform him or conclude the contract in writing.
Consumer protection
•If franchisees economically depend on the franchisor and are obliged to carry out orders they are regarded as employees – special labor law provisions apply.
Labor law
•Vertical distribution structures may fall under the Law Against Restraint on Competition and the European Antitrust Law.
•Especially exclusive minimum purchasing quantities are concerned.
•Price fixing and anticompetitive advertising is forbidden!
Antitrust and
competition law
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Financing of franchising can be tailored to the individual needs. The
following
components are common:
Financing of franchising can be tailored to the individual needs. The
following components are common:
Financing of Franchising
February 2, 2011 27Franchising in Germany
Entry Fee Royalties Investment
Paid for the introduction to the system and includes mostly:
supply of furniture, know-how, first training,
competitive advantage etc.
Payment for the continuous performance
by the franchisor (trainings, development of the system, market
analysis); paid either as a flat rate or as a
percentage of turnover or supply volume
Some franchise systems demand a single
investment to ensure liquidity of the franchisee
Franchisees of systems that fulfill the standard of the „KfW Mittelstandsbank“ can apply for co-
financing by this state owned bank. This standard demands that
• franchisees are guaranteed legal and economic independence
• competition by the franchisee after the termination of the franchise contract is only forbidden
if the duration of the contract is at least 10 years
• the franchise contract is governed by German law or the law of a member of the EU /EFTA
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The core element of a franchise contract is the franchise manual. All
questions that may arise must be addressed. That includes:
Franchise Manual
February 2, 2011 28Franchising in Germany
• Description of the franchise system
• Description of the market situation
• Guidelines on how to run the franchise outlet in terms of
quality and corporate identity; but: the entrepreneurial
freedom of the franchisee cannot be undermined completely.
• Scope of transferred Know-how : serves as proof in case of
disputes
Some franchise systems use the threefold approach meaning the agreement on a compendium that consists of:
1. the franchise contract2. franchise guidelines and 3. franchise manual
The manual can also be provided in an electronic version.
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• Expiration: if fix durations have been agreed upon – durations of 10 years are common.
• Ordinary cancellation: where cancellation periods have been agreed upon in the
franchise contract.
• Extraordinary cancellation: in case of breach of contract extraordinary cancelation by
both parties is always possible.
• Termination agreement: franchisor and franchisee may also conclude a termination
agreement.
• Exclusion: the possibility of termination can be excluded as long as the economical
freedom of the franchisee is not impaired. This is presumed to be the case where it is
excluded for more than 20 years. The individual interval is determined on a case-by-case
basis especially considering the amount of capital invested. That means: The higher the
investment of the franchisee, the longer the period in which termination may be
excluded!
Franchise contracts can be ended through expiration, cancellation or by
agreement
Termination of the Franchise Contract
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Fiduciary duties may persist even after termination. These entail especially:• Both the franchisor and the franchisee have to avoid damaging each other.• The franchisor has to take back the goods stored by the franchisee against
repayment of the sales price.
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Trademarks are essential for the functioning of the franchise system. They
give their owner the exclusive right of usage.
Intellectual Property: Trademarks
February 2, 2011 30Franchising in Germany
Protection can be sought for unique words, letters, numbers, pictures,
colors and sounds
International protection can be achieved by filing an application for
registration at a national Industrial Property office of the WIPO (DPMA for
Germany).
To protect a trademark it can be registered with the German Patent and
Trade Mark Office (DPMA).
The initial protection period is 10 years which can be extended
indefinitely if the renewal fee is paid every 10 years.
A Europe-wide community trademark can be registered with the Office for
Harmonization in the Internal Market (OHIM).
The owner can grant licenses that allow the licensee to use the trademark against payment of a fee.
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Intellectual property enjoys a strong protection in Germany. Other
available protection forms include:
Other Intellectual Property Rights
February 2, 2011 31Franchising in Germany
Patent Utility Model Design
Can be granted for inventions that are new, involve an inventive step and are susceptible of industrial application.
Can be granted for the same inventions that are eligible for patents but as opposed to patents utility models are granted without substantive examination of the invention.
Designs protect the outward appearance of a product.They have to be new, peculiar and susceptible of commercial use.
Everyone who has a domicile or seat in Germany is eligible to apply for registrations with the German Patent and Trademark Office. Others can file an application through a lawyer.
The German Act against unfair competition (Gesetz gegen unlauteren Wettbewerb –UWG) also protects the peculiar works of a product against imitation in the competitive behavior, i.e. through the distribution of counterfeits. All unfair commercial activities of competitors are prohibited. If a competitor turns to unfair market practice claims for damages, removal, omission and disclosure may arise or profits be skimmed.
www.gtai.com February 2, 2011 32Franchising in Germany
I. About Germany Trade & Invest
II. Introduction to Franchising
III. How to start a Franchise System in Germany
IV. The Franchise Contract
V. Links and Contacts
www.gtai.com
German Franchise Association: www.franchiseverband.com
European Franchise-Federation: www.eff-franchise.com
The World Franchise Council: www.worldfranchisecouncil.org
The German Franchise Institute: www.franchise-institut.de
Internationales Centrum für Franchising & Cooperation: www.franchising-und-cooperation.de
KfW Mittelstandsbank: www.kfw.de/EN_Home/index.jsp
Franchiseportal: www.franchiseportal.de
Franchise.de: www.franchise.de
Infofranchise.de: www.infofranchise.de
Further information can be obtained from the following websites:
Source: German Franchise Association, 2011
Links
33Franchising in GermanyFebruary 2, 2011
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Tax & Legal
February 2, 2011 34Franchising in Germany
© 2011 Germany Trade & Invest GmbH All information provided by Germany Trade & Invest has been put together with the utmost care. However , we assume no liability for the accuracy of the
information provided.
Tax & Legal ServicesMs. Christina Schön
ManagerT. +49 30 200 099-506F. +49 30 200 099-999
Tax & Legal ServicesMr. Heiko Stumpf
ManagerT. +49 30 200 099-509 F. +49 30 200 [email protected]
Germany Trade and Invest GmbHChief Executives:
Dr. Jürgen Friedrich, Michael Pfeiffer
Friedrichstraße 6010117 BerlinGermanyT. +49 30 200 099-0F. +49 30 200 099-111
Villemombler Straße 7653123 Bonn
GermanyT. +49 228 24 993 -0
F. +49 228 24 993 -212
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Germany Trade & Invest
February 2, 2011 35Franchising in Germany
or contact
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Germany Trade & Invest GmbH
Deutsche Anwaltsauskunft(Information Desk of the German Bar Association)www.anwaltauskunft.de
If legal advice is required, please contact a lawyer. To identify the most appropriate lawyer please consult:
If you are looking for a notary, please refer to the register of German notaries:
Deutsche Notarauskunft(German Federal Chamber of German civil law notarieswww.deutsche-notarauskunft.de
© 2011 Germany Trade & Invest GmbH All information provided by Germany Trade & Invest has been put together with the utmost care. However , we assume no liability for the accuracy of the
information provided.