Taking Over a Franchise in China: Check Authorisation, Debts and Completion Terms Before You Buy

Taking over an existing franchise may appear to save you the time needed to set up a new outlet. But it may also expose you to the previous operator’s debts, refund obligations and an authorisation that is about to expire. A franchise resale is not simply a purchase of equipment and premises: it also involves rearranging operating rights and responsibilities. This guide focuses on taking over existing franchise outlets in mainland China. First establish whether you can lawfully take over, then decide what you are buying, which liabilities you will assume and when to pay.

1. Establish whether you are buying assets, shares or rights under a franchise agreement

A seller’s description of an “all-inclusive business sale” does not define the legal scope of the transaction. Before proceeding, ask the seller for a detailed transfer schedule and clarify the proposed transaction structure.

• Asset purchase: You buy specified assets such as equipment, fit-out and stock. The existing franchise agreement, debts and operating licences do not automatically transfer simply because the equipment is handed over. You should still check for security interests, ownership and any liabilities you separately agree to assume.
• Share purchase: You buy shares in the company operating the business. The company itself generally remains the same legal entity, and its existing debts do not disappear when its shareholders change. You need to examine the liabilities of the whole company, not just the outlet’s sales figures.
• Transfer of contractual rights and obligations: You take over the rights and obligations under the existing franchise agreement. This requires the franchisor’s consent and the necessary contractual transfer arrangements; the seller’s assurance alone is not enough.

An outlet registered as an individual industrial and commercial household — a Chinese business registration category — cannot simply be acquired using a company share-purchase structure. Confirm with the relevant registration and licensing authorities whether the registered operator must change and how licences and permits should be handled.

It is particularly important to verify who will receive your payment. The store manager, a shareholder or the person actually running the business may not own the equipment or be the signatory to the franchise agreement. Ensure that the party entitled to dispose of the assets or transfer the rights signs the documents. Do not rely on a verbal introduction that they are “in charge of the shop”.

2. Obtain the franchisor’s written consent and confirm how authorisation will continue

Article 18 of the Regulations on the Administration of Commercial Franchising states that a franchisee may not transfer its franchise rights to another party without the franchisor’s consent. The Civil Code of the People’s Republic of China also requires the other contracting party’s consent when contractual rights and obligations are transferred together. A business transfer agreement between seller and buyer therefore cannot replace the franchisor’s consent.

Before you pay, ask the franchisor to confirm which route will apply: will you take over the existing agreement, or will it end and be replaced by a new one? Ideally, record this in a written agreement between all three parties, addressing at least the following:

1. What approval checks must the buyer pass, and when will authorisation to operate take effect?
2. How much of the existing franchise term remains, and is renewal permitted?
3. How will the existing security deposit be settled, and must the buyer pay a new one?
4. Will there be additional transfer, training or system activation fees?
5. Must the outlet be refurbished, and who will pay?

Do not mistake “consent to discuss a transfer” for “consent to the transfer”. If a regional manager gives assurances in a chat message, verify that they have authority to make those commitments on the franchisor’s behalf.

If a new franchise agreement is to be signed, the pre-contract disclosure and other requirements under the Regulations on the Administration of Commercial Franchising should be met. They should not be skipped simply because the outlet is already trading. Article 13 generally requires a franchise term of at least three years, unless the franchisee agrees otherwise; this rule does not apply to renewals. Taking over an existing agreement does not automatically restart its term.

3. Reconcile prepaid customer balances and historical debts separately

Turnover does not tell you the outlet’s full financial position. Prepaid balances, packages and multi-visit passes that customers have bought but not yet used may require you to keep providing services after the takeover without receiving corresponding new cash payments.

Ask the seller for summary records that protect personal information, and cross-check samples against orders, payment records and system balances. Focus on:

• Prepaid customer balances, unused packages, vouchers already sold and orders awaiting refunds;
• Amounts owed to the franchisor, suppliers and landlord, as well as utility bills and platform fees;
• Employee wages, social insurance contributions and employment disputes;
• Equipment leases, financing arrangements, guarantees and other encumbrances.

Also establish whether prepaid funds were collected by head office, the outlet or a third party, and who is contractually responsible for delivering the goods or services. The account receiving the money does not, by itself, determine all liability.

The parties can agree which balances the buyer will assume, how much funding the seller must provide to cover them and how costs arising from historical complaints can be recovered. However, an internal allocation of responsibility between buyer and seller does not automatically bind customers, employees or other creditors. Where debts are transferred, creditors’ consent must also be obtained as required by law.

Do not simply include a complete customer list in the transaction documents sent to prospective buyers. Prioritise de-identified data during due diligence. If completion involves transferring personal information, address notification, consent and other obligations under the Personal Information Protection Law of the People’s Republic of China, taking account of the transaction structure.

4. Link payments to completion conditions, not pressure from the seller

Structuring the transfer so that completion takes place only once agreed conditions have been met generally gives you more control than paying in full and sorting out the paperwork afterwards. Consider three checkpoints.

Confirm the conditions before signing. Specify prerequisites such as the franchisor’s written consent, the right to continue using the premises and the ability to obtain essential licences lawfully. Set out how the transaction can be terminated and payments refunded if those conditions are not met, so that responsibility is clear.

Carry out on-site checks on completion day. Both parties should jointly check stock and equipment, including equipment identification numbers, stock expiry dates, system access rights and outstanding charges. Till systems, food-delivery storefronts and brand accounts may not permit a simple password handover. Follow the franchisor’s and platforms’ rules for transferring accounts or opening new ones.

Keep a post-completion settlement mechanism in place. You may agree to retain part of the final payment or use a suitable arrangement for holding funds to cover historical refunds and unpaid charges within an agreed scope. The agreement should specify how amounts are calculated, what evidence is required, the deduction procedure and the deadline for final settlement, rather than allowing funds to be withheld indefinitely.

If the seller refuses to involve the franchisor, will not provide prepaid customer balances, or asks you to transfer money to a personal account before the contract is prepared, pause the transaction and have a lawyer and an accountant investigate.

The practical takeaway: prepare three checklists before taking over a franchise — authorisation and contract transfer, historical liabilities, and completion and payment. Until all three are resolved, do not treat the fact that an outlet is already open for business as proof that it is safe to buy.