date | theme

27. July 2022 | Set up a branch – these 5 points you should consider

28. July 2022 | Founding a subsidiary: what you have to consider here

29. July 2022 | Franchise as an alternative to branch and subsidiary (this contribution)

Franchise is a special distribution structure. Similar to a subsidiary, the franchise creates an independent company. However, the franchise does not have a franchisor-dependent participation in the franchise company. So you leave the foundation of another party. With this you then conclude a generally very regular franchise contract. It sets out all the details of future cooperation. For a fee, the franchisor in particular provides know-how as well as patent and trademark rights. In addition, he can offer the franchisee other services, for example in the area of marketing. For this, the franchisee may use a successful brand to operate on his own account and in his own name.

1st Franchise as a Vehicle for Expansion – Introduction

Anyone who is successful as an entrepreneur and wants to expand has the choice between several alternatives when implementing this project. On the one hand, you can simply build another plant. One either outsources a part of the operation in order to free up capacity for other purposes in the main office. Or you expand the capacities via the new plant. In both cases, control remains in the hands of the management – both over the main company and over the new establishment.

A conceivable alternative is the establishment of another branch. The latter is then also dependent on the management of the company, but receives to a limited extent powers in terms of power of control. So if you are prepared to hire a responsible branch manager for a branch, you have an alternative to a pure establishment.

Even more independence comes to a subsidiary. Because it acts completely autonomously in external relations. After all, the own management directs the fortunes of the subsidiary. It is only connected to its parent through its shareholding. Their responsibility towards their parent company thus corresponds to that which applies between shareholders and their company.

The expansion through a subsidiary in many aspects is very similar to that about franchise. This should now be in the foreground in this article.

2. What is a Franchise?

Franchise means a certain distribution system. In this sales system, it is special that you rely on external contractual partners to organize the sales of your own products. In this context, it is important that this relationship between franchisor and franchisee gives the franchisee complete autonomy in terms of legal and economic decisions. Only in the case of specifications regarding certain standards and norms may there be a contractually agreed right of instruction of the franchisor. But also the legal and economic independence of the franchisor remains unaffected within the framework of the distribution system franchise.

What is also relevant in this discussion is the scope of the types of services that can be offered through franchise through this sales organization. There are no significant restrictions on this. In fact, you can offer and sell both products and services on the market through franchise. Associated with this, other goods, in particular of an intangible nature, can also be sold via franchise. For example, you can transfer training or the transfer of application-oriented knowledge to a franchisee.

In any case, the franchisor provides the franchisee with a generally proven, mature business model. From this, franchisees hope for a corresponding economic and thus also financial success. Considering the fact that companies face a whole range of risks nowadays, this advantage is certainly of some importance and should clearly support a decision per franchise.

Legal Basis for the Franchise

This is a short chapter. Because independent legal regulations that affect the franchise, there are, at least in Germany, no. This is hardly surprising, because this is only a contractual relationship between two business partners that are equal in principle. So if legal regulations apply to a franchise, then they are in any case of a very general nature. They thus refer to the freedom of contract and the performance of contractually agreed services.

4th franchise - a short historical overview

Since the previous chapter was relatively short due to the general information, we have the opportunity to look at the history of the franchise phenomenon. We start with an etymological classification of the term franchise. He comes, unsurprisingly, from the French franc, which means free. In the Middle Ages and before, the Frankish was considered a free man. This freedom has been preserved by the French, who in their lineage invoke the Franks.

In terms of the franchise, we find first versions in the Middle Ages. At that time, however, franchise was understood to mean less distribution structures than the freedom to use land that landowners granted to contracted farmers for a fee. So the farmers themselves could determine how they wanted to cultivate the land. This model of outsourcing structures was already known, at least in France, under the term franchise.

However, the franchise of modern design has only developed relatively late. In fact, it was Coca-Cola that in 1892 transferred the production of their drink, which is still popular today, to external producers. They produced this product, which, incidentally, about a hundred years ago also contained cocaine, under license and distributed it under this label but for their own account and under their own name. Coca-Cola set the standards for production and received the license fees. At the same time, they saved the costs they would have borne in their own production and distribution. This is why the system franchise has also successfully spread in many other industries, especially in the area of system gastronomy.

5th Franchise as an alternative to other corporate structures

With which we would have already described the core principle of the franchise in simple terms. Because instead of setting up your own company branch, the franchise enters into a contractually regulated cooperation with external partners. Although they are bound to comply with certain production and distribution requirements, they alone are entitled to the profit from the sale of the product. In return, the franchisee pays fees to the franchisor. Those fees shall in particular apply to the granting of licences. In addition to the use of intangible rights, other services may also be provided by the franchisor to its franchisees, such as audits, training or marketing.

Therefore, compared to the establishment of a business, a branch or branch or a subsidiary in a franchise, no separate form of company is created by the franchisor. Consequently, a franchise does not entail any obligations for the franchisor in relation to the commercial register, the transparency register or a business registration, nor any secondary obligations related thereto. However, in terms of choosing a new location, the same selection and advance planning on the part of a franchisor is required as for any other entrepreneur. After all, the economic success of the franchisee also depends on the extent of the achievable license fees. In addition, a failure of a franchisee falls back on the franchisor, because he acted in the external effect under his name.

Our Conclusion on the Franchise

Franchise is an at first glance hardly comparable alternative to the establishment of a company, branch or branch or a subsidiary. In fact, however, there is a whole series of overlaps when starting a subsidiary. In particular, the largely independent company management is important here. Only the ownership of the franchise is a deviation from this. But this also involves the provision of assets to set up your own company. While you have to use your own funds when setting up a subsidiary or another form of company (this also means funds through external financing), this lies with the franchisee alone. This also avoids the establishment and maintenance of own sales structures, which also requires the avoidance of further follow-up costs as a consequence. In this way, a franchisor can maintain a relatively lean corporate construct and optimize its profits.

However, there are also many risks inherent in the franchise. This includes the fact that, at least in Germany, there are no specific legal bases that regulate the franchise. In particular, with regard to the conclusion of the contract and the information provided for such a decision, there is a need for clarification. In addition, the distribution of risk in the franchise is uneven in practice, because in most cases it prefers the franchisor. But the franchisor can also meet certain risks that are specific to the franchise. So it costs the franchisor part of the success generated for his product. After all, the franchisee also claims part of the profit made through him.

In any case, franchise offers foreign companies that want to expand into Germany a relatively uncomplicated alternative to establishing a company, branch, branch or subsidiary. All this is often associated with considerable bureaucratic hurdles. But German companies that want to expand abroad are also likely to see a tempting alternative in franchising.