Exiting a Franchise in China: Agree Stock, De-branding and Final Payments Before Signing

When choosing a franchise brand, start with a question that is easily overlooked: if the outlet leaves the network when its agreement expires, what happens to branded packaging, unsold goods and the final payment for supplies? A healthy franchise network needs workable exit arrangements as well as clear rules for opening. This guide focuses on settling accounts and completing the exit, rather than establishing a right to terminate the agreement.

1. Put exit settlement arrangements in the contract, rather than negotiating them after closure

Mainland China has specific rules governing commercial franchising. Article 11 of the Regulations on the Administration of Commercial Franchising requires franchise agreements to cover matters including amendment, rescission and termination, as well as liability for breach. That does not mean the law has already set out the practical procedures for stock buybacks, removing branding or settling the final accounts.

Article 567 of the Civil Code of the People’s Republic of China provides that the termination of contractual rights and obligations does not affect the validity of contractual provisions concerning settlement and winding-up. An exit settlement schedule is therefore no mere administrative extra: it may still determine how much each party owes and what documentation must be supplied after the outlet stops trading.

Before signing, distinguish between three situations: expiry at the end of the agreed term, an early exit by mutual agreement, and termination following a breach by one party. Different cost-sharing arrangements may apply in each case, but a blanket statement that ‘the franchisee bears all losses after exit’ is no substitute for specific rules.

Ask the franchisor for an exit settlement schedule setting out the trigger events, responsible parties, stocktake date, handover steps and payment deadlines. A salesperson’s assurance that ‘head office will deal with it when the time comes’ cannot replace an enforceable written commitment.

2. Check which stock can be returned — do not assume a right to a buyback

The end of a franchise does not automatically oblige the franchisor to buy back all remaining stock. Whether goods can be returned depends on the supply contract, their quality, the reason for termination and the parties’ agreement. Remedies for defective goods should not be confused with arrangements for returning ordinary slow-moving stock.

Before signing, draw up an exit stock schedule covering the following categories:

• Generic goods: Can you sell them independently, and are there any legally valid contractual restrictions?
• Branded goods: Is a limited sell-through period permitted after the brand licence ends, and what restrictions apply to sales channels and marketing?
• Specialist packaging and ingredients: Can they be returned or used after branding is removed, or must they be destroyed?
• Goods nearing expiry, opened goods and bespoke products: What acceptance criteria, price reductions and grounds for rejection apply?

For goods covered by a buyback commitment, also specify whether the price will be the original purchase price, a discounted price or an amount calculated using another formula. Clarify whether rebates already received will be deducted and who pays for transport and inspection. Avoid wording that simply says ‘returns are accepted if they meet head office requirements’ without objective criteria.

Pay particular attention to the identity of the actual supplier. If you pay an independent supplier for goods, a promise by the franchisor merely to ‘coordinate returns’ may not oblige that supplier to buy them back. Ask the supplier to sign an appropriate agreement, or specify the payment obligations the franchisor itself will assume.

3. Align the stock clearance period with the de-branding deadline

A common inconsistency is that the agreement allows stock to be sold off after exit but requires all use of the brand to stop on the day the licence ends. The outlet may still have saleable goods without clear permission to sell them.

If both parties agree to a sell-through period, put the permitted batches, timeframe, sales channels and any necessary use of branding in writing. Make clear that this does not renew the franchise relationship. Without confirmation, do not assume you can continue using branded shopfront signage, food delivery listings or descriptions such as ‘official franchise outlet’.

The de-branding checklist should go beyond ‘remove the sign’. It should cover shopfront branding, illuminated signs, menus, staff uniforms, in-store displays, online outlet names and promotional images. Where a platform’s review process prevents online information from being updated on the same day, agree a deadline for submitting changes, the evidence required and responsibility for any follow-up assistance.

Also specify who will carry out the work, who will pay and how the franchisor will verify completion. The franchisor’s right to inspect and collect branded items should not amount to unrestricted permission to enter the premises and remove all property. Removing branding does not mean the franchisee must surrender ownership of its own equipment.

4. Use a single settlement statement to close out charges and the handover

On exit, bring the final management fee, payments for goods, rebates whose conditions have been met, stock buyback payments and other outstanding items into one settlement statement. For each entry, show the calculation period, contractual basis, supporting evidence, paying party and due date. Do not simply accept an unverifiable ‘final balance’.

Specify exactly when recurring charges stop: on the contract termination date, the date services actually cease or another clearly defined date. Do not allow matters such as ‘the system account has not been closed’ or ‘head office has not yet approved the handover’ to justify charges continuing indefinitely. If some amounts are disputed, agree that undisputed sums will be settled first rather than holding up all payments.

The final handover document should include stocktake records, delivery receipts and photographs showing that branding has been removed. It should distinguish accurately between items confirmed as settled and those still outstanding. If a buyback payment has not yet arrived, be wary of signing a sweeping declaration that ‘neither party has any further dispute and all obligations have been fulfilled’.

Practical takeaway: Before paying to join a franchise, ask the franchisor to walk you through a complete exit at the end of the agreed term. Exit clauses are only truly workable when there is a plan for remaining stock, a process for removing branding, a cut-off date for charges and a deadline for final payments.