In simplified terms, franchising can be defined as a contractually stipulated business model for vertical cooperation between various partners, in which the franchisor leaves the legally and financially independent franchisees a business concept based on their specifications for use against payment. This clearly distinguishes it from the branch system .
The basic types are product, sales and service franchises. In the case of product franchising , also misleadingly referred to as a concession , production and sales are the responsibility of the franchisee. Sales franchising or distribution franchising is a decentralized vertical sales system with a mixture of indirect sales and direct sales . Service franchising is about standardized services.
Often, the rights and obligations to use brands , samples or designs are an important part of the agreements between the franchise partners, in addition to imparting know-how. The definition of regional responsibility and the time period are also central.
From the point of view of the franchisor, the advantage of franchising lies in the possibility of spreading the risk and, with the help of motivated partners, to expand the business, especially to international markets. From the point of view of the franchisee, in positive terms, this is the use of a promising business model with an established brand, with the help of capital, know-how and support services from the franchisor.
What is critically worked out about franchising is that it is not an equal partnership. The franchisor is clearly superior to the owner. The contractual relationship contains high risks for the franchisee. Contracts often lack transparency (pre-contractual duty to provide information). There is no legal regulation in Germany and there is insufficient legal security for the franchisee.
Franchising is accused of a tendency towards the standardization of products and services and of predatory competition and monopoly formation . This went hand in hand with cultural leveling (example system catering ), the establishment of mass taste and loss of quality.
The franchisee sells his products or services legally independently, pays fees for the use of uniform equipment, for a uniform name and appearance to the outside world, a symbol or for the use of a brand and for a uniform distribution system and often for joint accounting. The franchisor trains the franchisee, checks the implementation of the concept and can issue instructions.
The German Franchise Association defines franchising as follows: Franchising is a partnership-based sales system with the aim of promoting sales. The so-called franchisor takes on the planning, implementation and control of a successful type of business. He creates an overall entrepreneurial concept that his business partners, the franchisees, implement independently at their location.
There are different views of the cooperation model. While independent systems such as cooperatives, retail chains or agencies were initially set up in Europe , in the USA all distributors cooperating on the same level have been summarized under the term franchising. The close cooperation between franchisors and franchisees, which all remain as a legally independent company, is decisive for the existence of franchising. The cooperation only takes place within a contractually clearly defined framework. A franchise system is characterized by features:
- Independent entrepreneurs contractually agree on a long-term cooperation.
- In return for payment, the franchisee receives permission to dispose of the rights of the franchisor within a precisely defined framework. a .: Use of brand names and / or company, application of a recipe, creation and / or distribution of a product group.
- Support from the franchisor in setting up and running the business.
- Franchising differs from other forms of distribution through features such as manual, CI / CD, training, induction, mentoring, location analysis, area protection, civil law contract documents, central procurement options, etc.
- The basic idea is an amortization of the invested sum in a fixed time, mostly according to the license period.
- The franchisee has special rights in the so-called pre-contractual information phase. The franchisor must truthfully, understandably, completely and verifiably provide all relevant information about the system to the interested party.
Bottlers of beverages such as Coca-Cola or Pepsi belong to the group of goods and product franchising systems (“Product and Tradename Franchising”). In the 1950s, another form of franchising emerged, the so-called "Business Product Franchising". B. Systems in the hotel industry , gastronomy and trade count.
The main differentiating feature within the various franchise concepts is the content of the contract. In the case of goods and production franchising, the production and sale of a certain group of goods or individual goods is part of the agreements. In this type of franchising, the franchisor can act as a producer who works with a bottler (as with Coca-Cola ). There are also collaborations between wholesalers and retailers. This form of franchising is more widespread in the United States than in Germany, although there are also extremely successful, mostly specialist retail systems such as Fressnapf or OBI .
Service franchising has also become more popular in recent decades. Examples include McDonald’s , Burger King , BackWerk , Hallo Pizza or Subway in the catering industry, the French hotel group Accor (including Ibis , Mercure , Sofitel , Pullman) or the car rental company Hertz in the service sector . Social franchising is the name given to services in the social field.
A franchise system is a distribution system with independent entrepreneurs. A main feature is a uniform appearance on the market. It is shaped by the franchisees' work-sharing service program. The franchise system acts as a franchisor.
Franchising is not regulated by law and is based on the franchise agreement. The franchise contract is a mixed contract , which consists of elements of the license contract , distribution contract and know-how contract as well as additional regulations. The franchisor is usually obliged by the franchise agreement to grant the franchisee rights of use to property rights ( trademark law , copyright , design law , patent law ) and to provide the necessary know-how for which the franchisee has to pay the franchise fee. In addition, the contract area, training concepts, marketing and advertising concepts, control rights, reporting, accounting, non-solicitation and non-competition, contract duration and termination are usually regulated.
Not every successful business concept can be multiplied. Depending on the qualifications of the franchisee and the market conditions, it can be more easily reproduced than business models that have not been successfully tested. A simplification and standardization of the business processes should take place on the way to the franchise system. Another aspect of franchising is the high recognition value and consistently good performance of all franchise partners. Standardization is therefore necessary for the market presence.
According to the European Code of Conduct for Franchising, a company should have at least one successful pilot operation in order to be able to expand through franchising and thus become a franchise system. The pilot operation should also be observed over a longer period of time - approx. 1 to 2 years - since this is where the business idea is tested. The knowledge gained during this time can be decisive for the successful multiplication of the business idea.
The manual of a franchise system is the most important element for a successful expansion with franchisees, because it contains all the relevant information and the know-how to implement the business concept ideally. It is extremely detailed and contains specific instructions for the franchisee. Forms and statistics can be found here as well as statements about corporate identity , personnel policy, marketing and controlling .
What franchise systems offer franchisees varies from system to system. However, some services are specific to a franchise system. This includes, for example, protected know-how, a franchise agreement, support for franchisees and training opportunities.
The term “franchising” is derived from the French word “franchise”. In French, this means exemption from taxes or fees. In the 17th and 18th centuries, “franchise” in France and Great Britain was understood to mean the granting of a privilege that was given by kings to reliable personalities. These personalities had the right to produce or trade in certain products for a fee. In this context it becomes clear that “franchise” includes the use of rights against payment. In the second half of the 19th century, sales systems with depositaries, concessionaires and gérants were widespread, which are the forerunners of today's franchising.
Advantages and disadvantages
For the franchisee
- Entry into the market is accelerated when the system is known and established.
- The franchisee (often) has territorial protection (local monopoly) within the system.
- The franchisor provides a tried and tested business concept and a complete service package.
- The creditworthiness of some banks is higher if the entrepreneurial risk appears to be reduced.
- The franchisee can take advantage of economies of scale (e.g. with promotions or purchases).
- The franchisee receives efficient work processes that have proven themselves in practice.
- Continuous training and further education improves the franchisee's performance.
- Through the control of the franchisor, grievances are recognized and changed.
For the franchisor
- In particular, the franchisor uses the willingness of the franchisee to act as an independent entrepreneur.
- The franchisor can avoid the expense of a branch system and build up a sales network tailored to his company.
- The franchisor can generate sales with services (service, training, accounting, IT etc.) or reduce their own fixed costs
- The franchisor participates in purchasing benefits
- Increasing attractiveness with suppliers
- Rapid expansion opportunities
- Low economic risk.
- Lower risk in some liability issues through upstream contractors
- Contractual background under civil law - largely free contract drafting
For the franchisee
- Payment of entry fee, ongoing franchise fee, etc. (different models exist depending on the system)
- The risk that the franchisor's and other franchisees' own image will be adversely affected
- Less entrepreneurial freedom
- Little or hardly any influence on the franchisor's business planning (e.g. selling the system)
- Risk of conflicts of interest between franchisees and franchisees
- z. T. assumption of liability for third-party products and services
- There is no franchise law in Germany (e.g. on pre-contractual information obligations).
For the franchisor
- Foregoing part of the income
- Risk of being viewed by the labor courts, social security agencies and the tax office as an employer of pseudo-self-employed people and subsequently burdened with arrears with wages and social security contributions.
- Misconduct by the franchisee falls back on the franchisor.
- Elaborate controls are necessary
According to the guidelines of the DFV (Deutscher Franchiseverband), the franchisor is obliged, due to his knowledge advantage, to disclose all relevant key figures and calculation bases of the system to a franchisee applicant before signing the contract verifiably (in writing, in the national language) in order to enable the franchisee to assess the opportunities and risks of his own establishment. In the event of a violation of these guidelines, the franchisor faces the risk of extraordinary termination of the contract, claims for damages and civil lawsuits.
In 2014 there were a total of 1,075 franchisors and 72,384 franchisees with 541,040 employees in Germany. Franchise systems generated sales of 73.4 billion euros nationwide in 2014; in 2005 it was 32.3 billion euros.
The most important franchise activities in Germany (number of franchise systems / percentage of all franchise systems)
Total 614/100%, as of August 2015
- Hotel & catering 124 / 20.20%
- Retail & specialist trade 120 / 19.54%
- Personal care and care 72 / 11.73%
- Advice & training 71 / 11.56%
- Brokerage & rental 61 / 9.93%
- Other sales 35 / 5.70%
- Repair & renovation 31 / 5.05%
- Other services 30 / 4.89%
- Manufacturing & recycling 21 / 3.42%
- Cleaning & maintenance 19 / 3.09%
- Business help & office work 16 / 2.61%
- Transport & delivery 14 / 2.28%
In 2019 there were a total of 480 franchise systems in Austria (2/3 of them originating from Austria) with 9,400 franchisees (including 2,100 multi-unit partners) and 87,300 employees. Franchise systems generated an estimated turnover of 10.3 billion euros in 2019. A franchise system operates an average of 25 locations with 20 franchisees and 180 employees. 76% of the franchise systems have at least one self-operated location that is not in the hands of a franchisee.
The best-known franchise systems certainly originate from system catering . McDonald’s , Burger King and Subway are strongly represented on the German market with franchise partners. But franchise systems are also established in the service, retail, trade, and fitness and wellness sectors. Companies such as Apollo-Optik , Reno , Obi , Portas , Schülerhilfe and Musikschule Fröhlich clearly present the range of franchise systems in Germany. Most of the established car dealers of the major brands such as Mercedes-Benz or Volkswagen AG also work as a franchise system. The only exceptions are the direct branches of the manufacturers and brand-independent dealers.
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