Checking Franchise Eligibility in China: The ‘Two Stores, One Year’ Rule and Official Filing

When you are considering joining a franchise network, sales representatives may show you a map of stores across China or stress that the business has ‘completed its official filing’. These claims are worth checking, but neither directly proves that the business model is mature. For prospective franchisees considering mainland China, one important screening task is to establish whether the company you will sign with meets the requirements to offer franchises, particularly the ‘two stores, one year’ rule, and to understand what an official filing actually tells you.

1. Start by identifying who is offering you the franchise

China’s Regulations on the Administration of Commercial Franchises require a franchisor to be an enterprise; other organisations and individuals may not act as franchisors. The regulations also require franchisors to have a mature business model, the ability to provide ongoing services such as operational guidance, technical support and business training, and at least two directly operated stores that have been trading for more than one year.

Do not simply ask how long the brand has existed. First establish the full registered name and Unified Social Credit Code of the company that will assume the franchisor’s obligations under the contract. The brand may have existed for years, while the company recruiting franchisees and signing contracts may be newly established. Nor can the founder’s business experience automatically substitute for the requirements the company itself must meet.

Use China’s National Enterprise Credit Information Publicity System to check the company’s registration status, incorporation date and ownership information, then compare these with the proposed contract and the name on the company seal. If the sales team says that ‘it is enough for the group to meet the requirements’, ask exactly which group company operates the directly operated stores, how it is related to the contracting company, and what documents will be used as evidence.

2. Break the ‘two stores, one year’ rule into three checks

First: are the stores genuinely directly operated? Displaying the same brand name does not prove that a store is directly operated by the brand owner. Franchised outlets, partnership stores and outlets that merely receive management services should not be counted simply because a sales representative says they qualify. Ask the brand to identify the two stores it relies on to demonstrate compliance, and to provide their operating entities, addresses, relationship with the franchisor and actual operating arrangements.

Second: is there evidence of the direct-operation relationship? Cross-check store business licences, company registration records, ownership links, lease documents and evidence of actual operations. Whether stores run by subsidiaries or related companies qualify depends on the control relationship and the specific supporting documents. Do not treat ‘the owners know each other’, ‘they invested together’ or ‘they share the same brand’ as sufficient proof. Where the relationships are complex, ask the relevant commerce authority what evidence is required.

Third: is the operating history genuine and continuous? Check each store’s trading history separately, along with the evidence showing how long it has qualified as a relevant directly operated store. The establishment date on a business licence is not necessarily the date trading began. Likewise, if an existing store has been acquired, its original opening date alone does not prove that it has been directly operated for more than a year since the acquisition.

Create a comparison table with one row per store, recording the operating entity, the direct-operation relationship, the actual start of trading and the supporting evidence. Then visit the stores to confirm that they genuinely operate the relevant brand and business. A busy store only shows conditions on that particular day: it cannot replace evidence of its operating history, still less prove that your franchise will be profitable.

3. Official filing is not approval, and certainly not a guarantee of returns

The Regulations on the Administration of Commercial Franchises and the Administrative Measures for the Record-filing of Commercial Franchises establish a filing requirement: a franchisor must file with the relevant commerce authority within 15 days of entering into its first franchise agreement. This is a record-filing system, not an approval process that certifies a franchise’s returns or the safety of an investment.

When searching the commerce authorities’ commercial franchise filing records, use the company’s full registered name as your primary search term. Check that the entity on the filing is the same as the entity named in your contract, and review the information about the relevant brands and business resources. A screenshot or purported ‘filing certificate’ sent by a sales representative should not be your only evidence. If you cannot find a record, or the details do not match, make further enquiries with the authority.

Keep two questions separate: does the company meet the statutory requirements to offer franchises, and has it fulfilled its filing obligation on time? The filing deadline runs from the date of the first franchise agreement. A company that genuinely has not yet signed its first agreement cannot therefore be considered overdue solely because it has no filing record. However, ‘you are our first franchisee’ is not a reason to bypass the ‘two stores, one year’ requirement.

Conversely, finding a filing record does not mean you can skip the remaining checks. Filing does not replace an assessment of the company’s current status, the stores’ actual operations or its ability to provide ongoing support. Nor does it mean the government guarantees the franchise’s success.

4. If you find problems, identify the issue before acting

Different findings call for different responses:

• The contracting entity is unclear: Hold off on signing or paying. First establish who the franchisor is and who bears contractual responsibility. Do not accept personal promises as a substitute for corporate obligations.
• Evidence of direct operation or trading history is insufficient: Request further documents. Do not treat future store-opening plans, franchise outlet numbers or promotional photographs as proof that the requirements have already been met.
• The company is already franchising, but no filing can be found: Ask when it signed its first franchise agreement and what stage the filing has reached. If necessary, raise the matter with the relevant commerce authority.
• The documents contradict one another: Request a written explanation. If key facts remain unverifiable, consider ending negotiations rather than rushing to pay a deposit because a promotional offer is about to expire.

If you have already signed, do not assume that ‘no filing’ or ‘failure to meet the two stores, one year rule’ automatically means the contract is invalid and all fees must be refunded immediately. Regulatory liability and the civil validity of the contract must be assessed separately. The scope for a refund, termination or rescission also depends on the Civil Code of the People’s Republic of China, the relevant franchise rules, the contract terms and how the agreement has actually been performed. If you suspect misrepresentation, promptly seek professional advice on possible remedies. Stopping payments or closing the business without advice could create further disputes.

Practical takeaway: before signing, obtain the details of the two directly operated stores, verify their relationship with the franchisor and their operating history, then independently check the official filing. Eligibility checks are a basic screening step before joining a franchise network, not a guarantee of investment returns.