Building a franchise: testing your concept at a second location

Your existing business is doing well. But is that success based on a transferable concept, or on factors specific to your original operation? A second pilot location helps answer this question before you build a franchise network. The point is not simply to open another outlet, but to run a focused real-world test: which elements work under different conditions, which need adapting, and where does the concept reach its limits?

1. Set a clear test question rather than simply expanding

A pilot operation is useful when it reduces uncertainty. Before looking for premises, write down the assumptions you have yet to verify. Perhaps your original business relies on a loyal customer base built up over many years. Perhaps it benefits from unusually low rent, a nearby attraction that draws visitors, or personal connections with local businesses.

Turn these assumptions into questions you can test:

• Can the business attract enough customers without an established reputation?
• Does the offering work with a different customer mix?
• Can suitable staff be recruited on local employment terms?
• Can the business still deliver on its promise to customers with standard delivery lead times and normal purchasing terms?

Do not try to test too many challenges at once. A site that differs completely from the original business in location, size, product range and target audience will produce results that are difficult to interpret. For a useful test, the key differences should be deliberately chosen and documented.

The aim is not to showcase a second success. It is to understand the conditions that make that success possible.

2. Set up the pilot as you would a future franchisee’s business

Another company-owned operation can serve as a pilot. However, it must operate under conditions that would genuinely be available to future franchisees. Any special support from the original business must be made visible.

For example, record occasions when experienced staff step in at short notice, senior management personally introduces major customers, or head office takes on time-consuming administrative work. Such support is not inherently a problem. But it distorts the assessment if it will not be available or financially viable later.

Before starting, establish:

• which equipment and offering form part of the concept being tested;
• what support the pilot operation will receive;
• which tasks the local team will handle itself;
• which special terms apply only during the test;
• how additional staff time contributed by the original business will be recorded.

For a company-owned pilot, your financial modelling should also allow for costs that a future franchisee would have to bear. These may include franchise fees and reasonable remuneration for the owner’s work. This comparative calculation does not replace bookkeeping, but it helps prevent an internally supported operation from being prematurely judged a viable franchise model.

3. Set the observation period and decision criteria in advance

A strong opening period is not yet reliable evidence. Curiosity, promotional offers and hands-on support can all help a new business get off the ground. The test should therefore also cover normal trading and relevant seasonal fluctuations. Germany has no blanket statutory minimum duration for franchise pilot operations.

Define your assessment criteria before the results come in. Otherwise, you risk selecting only those indicators that support your desire to expand.

Consider three areas together:

• Demand: Do repeat purchases and orders continue after the launch advertising ends?
• Operations: Can the business deliver reliably with the planned staffing, equipment and supply arrangements?
• Financial viability: Can the business cover realistic running costs, including the charges and other costs that franchisees would face?

Also decide when changes or termination of the test will be necessary. If, for example, the business can only deliver on its promise to customers by permanently employing extra staff, that is not a minor flaw. The scope of the offering, operating processes or financial assumptions must then be reviewed.

4. Distinguish the legal framework from what the test actually proves

Germany has no dedicated franchise law and no general government franchise registration procedure. The main applicable legislation includes the German Civil Code (BGB), the German Commercial Code (HGB), depending on the circumstances, and competition and antitrust law. Standard-form franchise agreements are generally subject to the rules on standard terms and conditions in sections 305–310 BGB.

The European Code of Ethics for Franchising provides for a concept to be successfully tested over a reasonable period in at least one pilot operation. However, it is not legislation; its relevance arises particularly through membership of a franchise association or incorporation into a contract. A second pilot location is therefore not automatically a legal requirement, but a business safeguard.

Even a successful test does not justify guaranteeing success to prospective franchisees. Pre-contractual disclosure duties arise under general civil law, particularly sections 311(2), 241(2) and 242 BGB. Do not present a geographically limited trial as supposed proof that the concept will succeed across the market.

5. Use the test to define the limits of further expansion

At the end of the test, summarise the conditions under which the concept has been validated. These might include the size of the operation tested, customer groups, staffing needs and required support. Clearly distinguish verified findings from assumptions that remain untested.

The decision need not be simply ‘expand’ or ‘stop’. It may make sense to approve a limited rollout at comparable locations. Substantially different business formats would then remain excluded for the time being or require further testing.

Practical takeaway: Treat the second location as a learning opportunity, not a sales pitch. Only when you can explain why the concept works there and what conditions it requires will you have a sound basis for building your franchise network.