What are the requirements for a franchise

Become a Franchisee: Steps, Fees & Contract

1. Frequently asked questions & requirements

For around 40 percent of those surveyed in a study by the German Franchise Association, self-employment via franchise is an exciting alternative to the "conventional" start-up. No wonder, because as a franchisee, founders are legally and financially independent entrepreneurs. However, as such, they also give up some entrepreneurial freedoms as they are dependent on the franchisor's business policy. This places demands on its franchisee and thus restricts its partners to a certain extent in everyday business. Founders should therefore thoroughly check whether they can come to terms with a franchise partnership and whether they are up to the task as franchisees.

Franchisees are independent and self-employed entrepreneurs who have received a franchise (license) for the use of an existing business concept.

You can become a franchisee by finding a system that suits you and then contacting the franchisor. If there is an agreement, the franchise agreement can be signed and the company can be started.

Franchisees benefit in several ways:

  • Existing concept ensures quick market entry and less risk
  • Purchasing benefits and existing marketing
  • Extensive support from the franchisor

Ideally, founders should choose a system that is a member of the German Franchise Association to start as a franchisee. This ensures that the system is fair to all partners (the so-called compliance) and that all minimum requirements for support measures are met.

Since franchisees are legally independent entrepreneurs, the choice of legal form also depends on their own business goals. It may be the case that the franchise system prescribes a legal form for future franchisees, for example in order to exclude financial risks from the outset. As a rule, however, franchisees can choose the legal form that suits them and the business model.

Requirements to become a franchisee

There are big differences in the qualifications that franchisors require. In general, starting with a franchise is well suited for career changers. For many franchisees, professional and management experience, equity and motivation to implement an existing business idea are far more important than industry knowledge. Many franchise companies require the following aspects:

  • Entrepreneurial thinking and acting
  • Passion for the industry
  • Ambition for maximum success
  • Social skills
  • Corresponding equity
  • Basic business knowledge

With other franchise companies, more than just passion for a topic is required: Apollo Optik requires that you can prove that you have completed training as a master optician. The Fröhlich music school requires a good singing voice and knowledge of keyboard instruments to start the franchise. Holiday Land would like an already existing travel agency in a good location and 1 million euros in tourism sales as well as many years of experience in the sale of tourism products.

The following questions can help with the analysis of the qualification:

  • Do I have sufficient business know-how and am I ready to learn and further educate myself in my free time?
  • Do I want to focus significantly on sales, customer service, opening up the regional market and managing employees?
  • Am I able to motivate and lead other people?
  • Am I a team player and ready to accept decisions from the franchisor that I may not like?
  • Do I have enough self-confidence to fit into a given franchise concept?
  • Do I have enough financial means to bridge the first few months in an emergency?

Advantages and disadvantages as a franchisee

Compared to starting up with your own idea, franchisees have some advantages - but also disadvantages:

advantagesdisadvantage
  • Entrepreneurial freedom
  • Lower entrepreneurial risk
  • Know-how and expert knowledge of the franchisor is available
  • Entry and other costs and ongoing fees
  • Restricted decision-making options
  • Long contract

Of course, these are only a few, exemplary advantages and disadvantages for franchisees.

2. Costs & fees of a franchise

The fees and running costs for franchisees vary widely depending on the franchise system. There are concepts with which you can start for less than 15,000 euros, and there are also some for which equity capital of 100,000 euros is not sufficient - franchises without equity capital are rarely possible. Prospective franchisees should consider in advance how much equity they will bring with them and what kind of financing they may want to use for the franchise.

Starting with a franchise usually involves investments, an entry fee and an ongoing fee. In addition, many franchisors require the future franchisee to raise a certain amount of the total investment himself. Anything that goes beyond that can be achieved with franchise financing. For the franchisee, this means that a large amount of money has to be raised right from the start. This, in turn, means that a franchise company must permanently generate profits or have to build up reserves for emergency situations - otherwise the ongoing franchise fees, which are in addition to the running costs of the operation, cannot be covered.

Equity ratio

Most franchisors require the franchisee to contribute a certain proportion of the required capital through equity. In this way, the future franchisee shows commitment - and that he is sufficiently liquid and not exclusively dependent on financing. In 2019, the equity ratio of 42% of the franchise systems was 11-25%, and 24.5% of the providers even 26-50%.

Entrance fee

The entry fees for a franchisee differ considerably in amount depending on the franchise system. With some franchise systems, there are no entry fees for the franchisees at all. According to a study by the Franchise Monitor, the entry fees for a franchise in Germany are around EUR 10,300 on average. For example, the Hagebaumarkt, some kitchen studios and the OMV petrol stations do not require any entry fee. On the other hand, if the entry fee is more than 25,000 euros, eyes + more or North Sea, for example.

Investments

In addition to the entry fee, the costs of setting up the site are also part of the capital requirement. The investment sums depend primarily on the industry: It is obvious that it is cheaper to join a franchise company in the service sector, where you only need office space, than to set up and set up a whole restaurant or fitness studio as a franchise. The sum can even reach several 100,000 euros here. If you look at the total investment costs that a franchisee has to pay in the first year of franchise establishment, according to the Franchise Monitor you come to the following result: In over half of the franchise systems, the costs for the franchisee are less than 50,000 euros. With almost 40% franchisees have to invest between 100,000 and 200,000 euros and with the remaining 7% even more than 200,000 euros must be expected.

Ongoing fee

Regardless of the fixed sums that a franchisee initially has to pay, almost all franchise providers charge a monthly fee for the ongoing use of the franchise licenses, which is usually dependent on the respective turnover. Anyone who expects that companies with a higher entry fee will later take a lower percentage is deceiving, as this example shows: The special price hardware store charges an ongoing fee of 2.5% of net sales with an entry fee of 20,000 euros, the Hagebaumarkt without entry fee 0.15 to 0.25%. Since franchisees also benefit from the familiarity of the franchise system, most providers also have to bear proportional advertising costs.

3. Find the right franchisor

As with any other start-up, the business idea is the focus of the first considerations in franchising. However, franchisees are relieved of the hurdle of developing their own viable idea. So you only have to decide on an already existing business idea offered as a franchise. But how do you choose the right one from among the thousands of franchise providers in Germany alone? The following considerations can help:

  • In which industry do I want to work? What areas do I have experience in?
  • Which franchise systems do I already know? Which ones am I particularly interested in?
  • Which locations are possible? Am i ready to move?
  • How much equity do I bring with me?

The following graphic illustrates what a decision-making aid could look like that is filled out when researching a franchise company:

With your own answers and a clear franchise portal, overlaps can be identified - this is how a suitable franchise system can be found quickly. In all of this, however, it is important that founders do not allow themselves to be guided exclusively by possible sales and income opportunities when making their choice - they should rather be able to identify with the idea first. Because if you don't believe in an idea or if you don't enjoy your work later, then you are only working with half your strength and motivation.

Find the right one for you from many different franchise systems!

To the franchise exchange

4. Pre-contractual information & support

Once the right franchise system has been found, comprehensive communication with the franchisor is now required. Founders should have all relevant documents sent to them and work through them critically.

At a meeting with the people responsible for the acquisition of new franchisees, the concept will now be explained in detail to franchisees - an insight into the business figures can be requested, because if there is serious interest, there is an obligation to provide pre-contractual information. Estimate what the start as a franchisee will cost and what sales can be expected on the other side. The duties as a franchisee and, on the other side of the coin, the services of the franchisor are also important. Good franchise systems, for example, offer training in advance to prepare franchisees for everyday business. This is particularly important for career changers in order to get to know the specifics of the industries. Franchisees should definitely take part in these training courses and try to get a feel for whether they might really like the industry and the daily work. Future franchisees should include the following questions in the discussions:

  • What strengths / weaknesses does the franchise have in areas such as purchasing and sales?
  • Is there an area protection?
  • How high are the total costs and how are they made up?
  • How extensive are the training courses that prepare me for getting started?
  • What other offers of help on the part of the franchise are available?
  • Which services are offered by the franchise (e.g. accounting)?
  • Is there a comprehensive manual on operational management?
  • Do I have a permanent supervisor / contact person?

Support from start to finish

In franchising, it is common for franchisees to get support from the provider. In order to ensure successful entry into the system, this support begins even before the contract is signed. Many franchise systems have their own training centers where they train their franchisees. Training courses focus in particular on the system's industry, but the franchise also often offers training in matters of taxes, marketing or sales. In addition, a good franchisor supports its partners in planning the financing. As a rule, the franchisor submits his internal financing, liquidity and profitability plans to the franchisee as a basis for the calculation. Franchisors sometimes also offer loans, rent subsidies, commercial credits or staggered entry or ongoing fees.

In addition to the quantitative factors, personal chemistry should also be right. Do you feel comfortable with the franchise and can you imagine becoming part of the family? Be sure to talk to existing franchisees and observe them in the branches. There, prospective franchisees can get a detailed picture of the franchise system in practice and get a feel for their upcoming work.

Franchisors usually support their new partners in the following areas:

AreaDescription
Location searchThere are two options here: Either the franchisor already has available locations from which a decision can be made, or a completely new location will be developed.
financingBecause the franchisor reveals his figures as a calculation aid, franchisees have better chances of getting a bank loan. Some systems also offer loans, grants for rent, and credit for suppliers and / or goods.
Purchasing conditionsDue to its positioning, the provider can negotiate discounted purchasing conditions from suppliers for its new partner.
marketingNational advertising is appropriately handled by the franchisor, so the franchisee only has to take care of local advertising.
Initial and continuing educationIn most cases, training for the new franchise partner begins before the contract is signed. These so-called introductory training courses help franchisees to gain an overview of the upcoming tasks and initial insights into the system.

5. Business plan & location analysis for franchisees

If you have discovered a suitable system for yourself and the pre-contractual clarification has taken place, you can start now! And how could founders better prepare for their start as franchisees than with a business plan? Because at the latest to finance the establishment of a franchise you have to go to the bank. And when talking to the bank, franchisees must be able to present a business plan that convinces the bank advisor to grant a loan.

The good thing: When starting a franchise, numerous elements such as an idea, target group or unique selling point are already specified by the system in the business plan. However, the time has now come to verify the individual points yourself.

With many franchise systems, the location is also a key success factor. The franchise system should definitely support the new partner in their selection, as there are usually certain requirements for the location and the system can better assess the chances of success of a location on the basis of the experience gained. A detailed location analysis can be used to compare possible alternatives. Do a little market research at the chosen location to see how the offer is received.

In terms of financial planning, the system should support its franchisees by paying other system partners. Make sure, however, to adapt the profitability figures to your location and check them for plausibility.

6. Franchise Agreement: Rights & Obligations

In franchising, both parties conclude a franchise agreement that sets out the general conditions of business activity such as the duration of the cooperation or the rights and obligations for franchisees and franchisors. The more precisely the rights and obligations of both franchise partners are defined, the smoother the cooperation will work.

The franchise contract contains, among other things, clauses on territorial protection and the franchisee's payment obligations, but also provisions with regard to the purchase of goods, the services offered by the franchisor or the term of the contract. It is also advisable to consult a lawyer to review the franchise agreement.

Rights & obligations for franchisees

rightDuties
  • Proven system with a positive image and market advantages
  • Receipt of a franchise manual from the provider: all information about the system can be found here. Know-how for successful business management should also be included
  • Support from the provider: the scope differs depending on the contract, but should always include training and further education within the company
  • Use of advertising for the franchise
  • The principles and regulations in the manual must be adhered to
  • Training courses, workshops and other seminars must be attended
  • Payment of the contractually agreed fees
  • Regional marketing measures to strengthen the brand
  • Cooperation with the system administrator
  • Maintain brand identity
  • The franchisor must be informed about the development of the branch

Everything fits?

If all the traffic lights are green, the only thing missing is the signature on the franchise agreement. Before you blindly sign in the face of all the euphoria about founding, it is advisable to consult a lawyer, as the regulations can be very complex. Above all: Founders should never sign something that they have a bad gut feeling about. Support from an expert with a legal background in the franchise industry may not always be cheap, but franchisees may later regret not having it. Clauses can quickly appear in the franchise agreement that you will struggle with later in your business activity. A good lawyer can prevent this from happening.

7. Conclusion: After the signature

Once the contract has been signed, the next step is the practical establishment of a company and the targeted recruitment of employees, because franchise systems are usually not designed for lone warriors. Employees will make a significant contribution to your success. The selection should therefore be made carefully. Let the system support you and talk to other franchise partners about their experiences. If founders lack management experience, it is urgently advised to take courses before starting work that will help them deal with their own employees. Some franchisors even offer their own seminars in the area of ​​employee management - use this opportunity in such a case.

With the opening you have finally completed the preparation phase. Now franchisees can take advantage of the system's brand awareness and marketing benefits. Continuous support for the franchisor includes further training from the franchise headquarters. You can also use the regular network meetings of the franchise partners. In terms of marketing, the know-how of the headquarters can be used.

Franchisee Checklist

A franchise is the perfect alternative to a "conventional" business start-up for founders who have business administration skills as well as fun and experience in staff management. Newcomers benefit from the active support and coaching of the franchisors. However, becoming a franchisee is not as easy as some franchisors make it look. Nevertheless, this can be managed very well with good planning and a well thought-out pre-selection of franchise partners. The following short checklist can provide an initial overview of what needs to be done:

  • Qualification: Education and training and professional experience
  • Finances: Sum of the one-time and ongoing costs
  • Find franchisors: Research for suitable systems
  • Contact:Talks with the franchisor
  • Write a business plan - especially if funding is planned
  • Set up a franchise agreement: Rights & obligations from both sides
  • Hire and open employees

Supported advice from the start

Whether choosing the right franchise system, financing the establishment of a franchise or negotiating the franchise contract - as a franchisee, you should rely on external support. In this way, mistakes can be avoided that could otherwise be expensive later on. The good news: As a franchisee, you can receive subsidized franchise advice like any other start-up. There are various promotional institutes for this purpose, above all the KfW promotional bank. With subsidized business start-up advice, a franchisee can save between 50 and 80% of the advice costs.

Get started now and become a franchisee!

Find the perfect franchise system

Author: Für-Gründer.de editors

As editor-in-chief, René Klein has been responsible for the content of the portal and all publications by Für-Gründer.de for over 10 years. He is a regular interlocutor in other media and writes numerous external specialist articles on start-up topics. Before his time as editor-in-chief and co-founder of Für-Gründer.de, he advised listed companies in the field of financial market communication.