China Law and Practice The most common legal challenges with a franchise | 页面 2

The China Question: Expanding a Franchise

My business is already in China, but I want to expand it from its
current base in Shanghai through franchising.
The Specialist Perspective

1. Basic information of the franchisor and the franchise activities;
2. Basic information of the franchisor’s possession of operational resources;

When setting up a franchise in China, there are many legal issues you need to consider. You need to

3. Basic information regarding franchise fees;

make sure that the legal entity you want to be the franchisor (only enterprises can be franchisors) has

4. Prices and conditions of products, services and equipment to be supplied to the franchisee;

owned and operated a minimum of two company-owned units, for more than one year, for each unit.

5. Continuous services to be provided to the franchisee;

This is the famous 2+1 issue for anyone who will engage in franchising. It is the minimum requirement

6. Specific method and contents of guidance and supervision of the franchisee’s operation;

for a company to be legally qualified as a franchisor, according to current legislation. However, the two

7. Investment estimate of franchise unit;

company-owned units are not strictly required to be located within the PRC, which means as long as

8. Relevant information on the franchisee(s) within China;

a company has owned and operated the two company-owned units anywhere in the world, for more

9. Abstract of financial accounting report and abstract of auditing report of the past two years that

than one year for each unit, the 2+1 issue will not be a barrier for them.

have been audited by an accounting firm or an auditing firm;
10. The franchisor’s material litigation and arbitration in the past five years related to the franchise

You should also make sure that the legal entity you want to be the franchisor has the right to use

activities;

any related intellectual property that is closely associated with the business format of your franchise.

11. Record(s) of any material illegal operation of the franchisor or its legal representative; and

Basically, the prospective franchisor should have the trademark registered in China before it signs a

12. Franchise contract text.

franchise contract with a franchisee. Considering that it will take some time for a trademark to be
registered in China, it is advisable for you to start this process as soon as possible.

Lastly, remember to file your franchise with the related commercial authority, local or central,
depending on the size of your franchise, within 15 days of signing the franchise contract.

Ensure that you have prepared basic legal paperwork, which is also required for a prospective
franchisor before it signs a contract with any franchisee. The legal paperwork mentioned is referred

Anyone about to engage in franchising should also refer to the Regulations for the Administration of

to as the Franchise Disclosure Document (FDD), which contains 12 items that the franchisor must

Commercial Franchising (商业特许经营管理条例) .

disclose to the prospective franchisee in writing, a minimum of 30 days before it signs the franchise
contract. The 12 items required are as follows:

James Liu, FranChina, Beijing

Copyright: All material subject to strictly enforced copyright laws. © 2014 China Law & Practice

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