Buying a franchise: check your contractual partner in a master franchise

A well-known international brand can inspire confidence. But if you open a franchise business in Germany, you will not necessarily sign your agreement with the international headquarters. An independent master franchisee may sit between you and the brand, developing the franchise system in Germany. Before you join the franchise network, it is therefore essential to establish which company actually owes you which services, and what happens if its relationship with the brand ends.

1. Understand the contractual structure behind the brand

In a master franchise arrangement, the original franchisor grants a company rights for a defined territory. Within the scope of those rights, that company can enter into agreements with local franchisees, acting as their franchisor. Your agreement is then a sub-franchise agreement, even if all public-facing branding uses only the international brand.

This is different from a company that merely introduces prospective franchisees or acts on behalf of the international headquarters. A German contact address alone does not tell you which role the company performs.

Before having the agreement reviewed, ask for a written explanation of the structure:

• What is the full legal name of your proposed contractual partner, including its legal form and registered office?
• Is it entering into the agreement in its own name or as a representative of another company?
• Who is the original franchisor, and are there any companies between it and your contractual partner?
• Which company issues invoices, receives payments and provides the promised services?

Check this information against the draft agreement and up-to-date company register records. Also verify that the person signing has authority to represent the company. A brand name on a presentation is no substitute for these checks.

2. Understand the German legal framework

Germany has no dedicated franchise legislation and no government franchise register. Neither a franchise system nor its agreement requires franchise-specific approval from a public authority. General registration and business notification requirements, as well as any sector-specific licensing requirements, still apply. An entry in the commercial register is therefore not a government seal of approval for the business model.

Franchise agreements are governed in particular by the general provisions of the German Civil Code (BGB), the German Commercial Code (HGB) where applicable, and German and EU competition law. Standard contract terms are subject to sections 305–310 BGB, with specific rules applying to business-to-business dealings. Section 307 BGB is particularly important: clauses must be transparent and must not place the other party at an unreasonable disadvantage.

Even without specific disclosure legislation, duties to have regard for the other party’s interests and to disclose relevant information arise during contract negotiations under sections 311(2) and 241(2) BGB, informed by the principle of good faith in section 242 BGB. In a sub-franchise arrangement, these duties generally fall on the master franchisee as your proposed contractual partner. A presentation by the international headquarters does not replace that responsibility.

By contrast, the German Franchise Association’s Code of Ethics is a form of industry self-regulation, not legislation. If association membership is mentioned, check exactly which company is a member. Membership held by another company in the group does not automatically mean that your contractual partner is also bound by the code.

3. Check rights and service obligations together

The master franchisee can only grant you rights that it is authorised to pass on. Ask for verifiable evidence that it is entitled to enter into sub-franchise agreements in Germany for the concept being offered. This concerns not only the brand, but also the right to use and pass on the operating concept and the necessary know-how.

The full master franchise agreement may contain confidential information. Relevant extracts from the agreement or a specific written confirmation from the original franchisor may therefore also provide a basis for review. These documents should allow your lawyer to assess the position; a general promotional letter is not enough.

Three questions are particularly important:

• Scope: Does the authorisation cover your proposed business, intended location and agreed operating format?
• Duration: Does the remaining term of the master franchise agreement cover your planned contract term?
• Conditions: Does the continuation of the master franchise rights depend, for example, on development targets that your contractual partner must meet?

Next, identify which company is responsible for each key service. If training is offered by the international headquarters, for example, it should be clear whether your contractual partner is legally obliged to ensure that it takes place. A simple statement that another company will take care of it does not, in itself, give you a direct claim against that company.

4. Protect your position if arrangements above your business change

A particular risk arises if the master franchise agreement ends while your own agreement is still running. Your agreement does not automatically entitle you to have the international headquarters take it over. Nor does membership of the same corporate group, on its own, make other group companies broadly liable.

Have the interaction between the two contractual levels reviewed. Is there a direct agreement with the original franchisor? Are there binding arrangements for it or a new master franchisee to continue the relationship? Who must consent to a change, and will the existing terms and payments already made be honoured?

A unilateral promise from the master franchisee that the international headquarters will step in if necessary is not sufficient protection. If the headquarters is to assume obligations, it must be bound in a legally effective way. The precise arrangements require specialist legal advice.

Practical takeaway: Before signing, map out the entire contractual chain on one page. For each link, identify the company, its rights, the relevant term and its service obligations. If a key link remains undocumented, clarify it before committing — not after opening.