Franchising can be an effective way to expand into China without establishing your own operations. However, China has specific franchise regulations that foreign businesses must understand and comply with.
Legal Framework
Key regulations governing franchising in China:
- Commercial Franchise Administration Regulations (2007)
- Commercial Franchise Filing Administration Measures
- Commercial Franchise Information Disclosure Administration Measures
What Qualifies as a Franchise?
Under Chinese law, a franchise involves:
- Franchisor licenses trademark, trade name, or other business resources
- Franchisee operates under unified business model
- Franchisee pays fees to franchisor
Key Requirements
Two-Store-One-Year Rule
Before franchising in China, franchisor must have:
- At least 2 company-owned stores
- Operating for at least 1 year
- Can be stores anywhere in the world
Important: Failure to meet the 2+1 requirement can make franchise agreements voidable and expose you to penalties.
Filing Requirement
Franchisors must file with MOFCOM:
- Within 15 days of signing first franchise agreement
- Annual updates required
- Information is publicly accessible
Disclosure Obligations
Must provide franchisees with detailed information at least 30 days before signing:
- Franchisor's basic information and history
- Registered trademarks and IP
- Franchise fees and payment terms
- Training and support provided
- Franchisee obligations
- Territory and exclusivity
- Contract renewal and termination
- Litigation history
- Financial information
Franchise Agreement Essentials
Chinese law requires certain terms:
- Minimum 3-year initial term
- Clear fee structure
- Training and support obligations
- Quality control provisions
- Termination conditions
Cooling-Off Period
Franchisees have the right to:
- Cancel within reasonable period after signing
- Typically interpreted as 7-30 days
- Should be specified in agreement
IP Protection
Critical considerations:
- Register trademarks in China before franchising
- Include strong IP protection clauses
- Monitor for infringement
- Plan for post-termination IP issues
Common Pitfalls
- Not meeting 2+1 requirement
- Inadequate disclosure
- Failing to file with MOFCOM
- Weak IP protection
- Poor franchisee selection
- Insufficient quality control
Enforcement and Disputes
If problems arise:
- Negotiation and mediation
- Arbitration (often preferred)
- Court litigation
- Regulatory complaints
Planning to Franchise in China?
I help foreign businesses structure compliant franchise programs in China, from registration to agreement drafting and dispute resolution.
Contact MeDisclaimer: This article is for informational purposes only and does not constitute legal advice. For advice on your specific situation, please contact me directly.
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