CHANG TSI
Insights
As a relatively mature business model, commercial franchising plays a significant role in driving brand expansion and resource integration. In 2024, the number of stores operated by the TOP 300 commercial franchising enterprises in China surpassed 830,000, marking a year-on-year growth of 30.73%. Among these, the retail sector accounted for 40%, the food and beverage sector for 33.67%, and the lifestyle services sector for 26.33%. To help enterprises clarify legal boundaries and effectively mitigate compliance risks, this article provides an in-depth analysis of the legal regulations, compliance essentials, common risks, and practical coping strategies related to franchising in China, aiming to offer actionable guidance for enterprises to achieve compliant operations.
Commercial franchising in China is governed by the Regulation on the Administration of Commercial Franchising, which defines its scope, rules, rights, obligations, and liabilities. The Measures for the Administration of Information Disclosure of Commercial Franchising stipulate the scope, timeline, and consequences of non-compliance with disclosure obligations. The Measures for the Administration of Commercial Franchising Filing regulate the filing process. Additionally, related laws such as the Civil Code and the Anti-Unfair Competition Law provide further safeguards in areas such as contract enforcement and maintaining fair competition.
1. Basic Conditions for Conducting Franchising
Firstly, regarding eligibility, the franchisor must be an enterprise; individual businesses and non-enterprise entities cannot engage in franchising.
Secondly, the franchisor must meet the "two stores, one year" requirement, meaning they must own at least two directly operated stores that have been in operation for over one year. In practice, directly operated stores can take the form of branches, subsidiaries, or individual businesses operated by the franchisor's controlling shareholder.
2. Requirement of Recordal
According to the Regulation on the Administration of Commercial Franchising, it is requied to file the recordal of the commercial franchising. Specifically, the franchisor must file with the competent commerce department within 15 days of signing the first franchising contract. Additionally, when significant changes occur in key franchising information, including changes in the franchisor's business registration details (such as name, address, registered capital), operational resources (including trademarks, patents involved in franchising), or the distribution of all franchisee stores within China, the franchisor must apply for changes with the filing authority within 30 days.
Failure to file as required may result in fines ranging from CNY 10,000 to 50,000. If the franchisor still fails to comply after being ordered by the competent authority, fines may increase to between CNY50,000 and 100,000.
3. Disclosure Obligation
According to the Regulation on the Administration of Commercial Franchising, at least 30 days prior to signing a franchising contract, the franchisor must provide the franchisee with important information related to the franchise in writing. The Measures for the Administration of Information Disclosure of Commercial Franchising further specify the requirements for information disclosure, as detailed in the table below:
| No. | Disclosure Information | Requirements |
| 1 | Basic Information About the Franchisor and Franchising Activities |
Franchisor's name, contact address, phone number, legal representative, general manager, registered capital, business scope, and the number, addresses, and phone numbers of existing directly operated stores. An overview of the franchisor's commercial franchising activities. Basic information regarding the franchisor's filing status. If the franchisor's affiliates provide products or services to the franchisee, the basic information of such affiliates must be disclosed. Any bankruptcy or bankruptcy filings by the franchisor or its affiliates in the past two years. |
| 2 | Basic information about the franchisor's operational resources. |
A written description of registered trademarks, corporate logos, patents, proprietary technologies, business models, and other operational resources. If the owner of the operational resources is an affiliate of the franchisor, the basic information of the affiliate and the details of the authorization must be disclosed. Additionally, it should be explained how the franchise system will be handled in the event of suspension or early termination of the authorization agreement with the affiliate. The status of any litigation or arbitration involving the franchisor's (or its affiliates') registered trademarks, corporate logos, patents, proprietary technologies, or other operational resources related to franchising. |
| 3 | Basic information about franchising fees. |
The types, amounts, standards, and payment methods of fees collected by the franchisor and on behalf of third parties must be disclosed. If certain details cannot be disclosed, the reasons must be explained. If the fee standards are not uniform, the highest and lowest standards must be disclosed, along with an explanation of the reasons. The collection, refund conditions, refund timeline, and refund method of the security deposit. If the franchisee is required to pay fees before signing the franchising contract, the purpose of these fees, as well as the conditions and methods for their refund, must be disclosed. |
| 4 | The prices, terms, and other details regarding the products, services, and equipment provided to the franchisee. |
Whether the franchisee is required to purchase products, services, or equipment from the franchisor (or its affiliates), along with the related prices and terms. Whether the franchisee is required to purchase products, services, or equipment from suppliers designated (or approved) by the franchisor. Whether the franchisee is allowed to choose other suppliers and the conditions those suppliers must meet. |
| 5 | The provision of ongoing services to the franchisee. |
The specific content, delivery methods, and implementation plan for business training, including the training location, methods, and duration. The specific content, delivery methods, and implementation plan for technical support, including the names and categories of operational resources, as well as the types of products and equipment. |
| 6 | The methods and content for guiding and supervising the franchisee's business activities. |
The specific content, delivery methods, and implementation plan for business guidance, including site selection, interior decoration, store management, advertising and promotions, and product configuration. Methods and content of supervision, the obligations the franchisee must fulfill, and the responsibilities for failing to meet these obligations. The division of responsibilities between the franchisor and the franchisee regarding consumer complaints and compensation. |
| 7 | The investment budget for franchise outlets. |
The investment budget may include the following expenses, including franchise fee, training fees, real estate and renovation costs, purchase of equipment, office supplies, and furniture, initial inventory, utilities (water, electricity, gas), fees for obtaining licenses and other government approvals, initial working capital. The sources and basis for estimating the above expenses. |
| 8 | Relevant information about the franchisees within China. |
The current and projected number of franchisees, their geographical distribution, scope of authorization, and whether there are exclusive authorized territories (if applicable, the specific scope should be specified). The current business performance of existing franchisees, including their actual investment amounts, average sales volume, costs, gross profit, and net profit. Additionally, the sources of the above information should be specified. |
| 9 | Summaries of the franchisor's financial accounting reports and audit reports audited by an accounting firm or auditing firm for the past two years. | |
| 10 | The franchisor's litigation and arbitration cases related to franchising over the past five years, including the cause of action, claims (arbitration requests), jurisdiction, and outcomes. | |
| 11 | Records of major illegal business activities of the franchisor and its legal representative. |
Those fined over CNY 300,000 by relevant administrative enforcement authorities. Being held criminally liable. |
| 12 | Franchise contract document. |
If the franchisor fails to fulfill disclosure obligations as required, they may face fines ranging from CNY 10,000 to 50,000. In severe cases, they could be fined between CNY 50,000 and 100,000 by the authorities. Additionally, if the franchisor conceals information that affects the execution of the franchise contract, preventing the contract's purpose from being realized, or provides false information, the franchisee has the right to request the termination of the franchise contract.
4. Requirements for Franchise Contracts
The Regulations on the Administration of Commercial Franchising set specific requirements for the establishment of franchise contracts.
In terms of form, franchise contracts must be in written format. Regarding content, in addition to the basic terms of the contract, the contract must also include provisions related to business guidance, technical support, and operational training services; provisions concerning product or service quality assurance, promotions, and advertising; and provisions related to consumer rights protection.
Furthermore, unless agreed upon by the franchisee, the franchise term specified in the initial franchise contract should not be less than three years. The contract should also include a "cooling-off period" or "withdrawal period" clause, allowing the franchisee to unilaterally terminate the contract within a certain period after its conclusion.
5. Franchisor’s Other Obligations
(1) Providing Franchise Operation Manuals
The Regulations on the Administration of Commercial Franchising require franchisors to provide franchisees with franchise operation manuals and to continuously offer business guidance, technical support, and operational training to franchisees in accordance with the agreed-upon content and methods.
(2) Reporting Obligations to the Business Administration Department
According to the Regulations on the Administration of Commercial Franchising and the Administrative Measures for Franchise Filing, franchisors must report the status of franchise contracts signed, revoked, terminated, or renewed during the previous year to the filing authority by March 31 each year. Failure to fulfill these reporting obligations as required may result in fines of up to CNY 10,000. In severe cases, fines ranging from CNY 10,000 to 50,000 may be imposed.
In the field of commercial franchising, failure to complete filing as required, non-compliance with the "two years, one store" condition, and failure to fulfill information disclosure obligations in accordance with the law are high-frequency compliance risk points in the industry. These are also key areas of focus for supervisory inspections by regulatory authorities.
Based on publicly available administrative penalty records in the Beijing region, many well-known chain brands have been subject to administrative penalties due to non-compliance in the franchising process. For example, a well-known petroleum company and a well-known fast-food brand were penalized for failing to file with the relevant business administration department as required. Similarly, a Beijing-based catering management brand was fined 50,000 yuan for failing to meet the "two stores, one year" condition and for not filing with the business administration authority within the prescribed timeframe.
The strict regulatory oversight by authorities in the franchising sector highlights their strong emphasis on the standardized development of the industry. It also serves as a warning to all enterprises intending to engage in or currently involved in franchising activities: compliance management must be integrated throughout the entire business process. Enterprises must pay close attention to key compliance aspects such as filing, qualifications, and information disclosure, to avoid administrative penalties, protect their reputation, and ensure long-term development.
1. Strengthen Basic Conditions to Ensure Eligibility
Plan ahead by establishing direct-operated stores, ensuring at least two stores operate stably for one year, and retain business records (such as lease contracts and revenue data) as proof.
2. Strictly Fulfill Filing Obligations
Complete the filing within 15 days after signing the first franchise contract. You can enlist professional agencies to assist in organizing filing materials (such as proof of business resources and direct-operated stores). Additionally, establish a tracking mechanism for information changes; any changes in business information, resources, or franchisee distribution must be filed within 30 days.
3. Diligently Fulfill Information Disclosure Obligations and Reporting
Ensure that statutory information is disclosed in writing at least 30 days before signing the franchise contract with the franchisee. Retain evidence of disclosure (such as franchisee receipt slips or courier records) to avoid disputes arising from "non-disclosure" or "inability to prove disclosure."
4. Enhance Contract Management
Clearly define the business term (preferably not less than three years) and the period for the franchisee's unilateral termination rights (e.g., within 30 days after signing). Specify fee rules (including conditions for deposit refunds and whether franchise fees are refundable) and service support content (such as training frequency and technical support methods) to reduce disputes during contract execution.
5. Strengthen Ongoing Compliance Management
During the ongoing operation of franchising, conduct multi-dimensional compliance management: regularly update the franchise operation manual, provide training and technical support to franchisees as agreed in the contract, and retain service records like training sign-in sheets and technical guidance emails as proof of performance. Complete annual reporting on time, submitting the previous year's franchise contract status to the business administration department in the first quarter. Conduct regular compliance self-checks, focusing on maintaining the "two stores, one year" condition, timely information disclosure, and accuracy of filing information to proactively identify and mitigate potential compliance risks.
