Franchise Terms in China: The Three-Year Rule and Why the Start Date Matters

Two agreements may both promise a ‘three-year franchise’, yet offer different amounts of actual trading time depending on whether the term runs from signing or from the official opening. For investors considering a franchise in China, the initial authorisation period is not a minor detail buried at the end of the contract. It determines how long you can use the brand’s resources, who bears the consequences of delays in preparation, and whether your right to operate could expire before you have recouped your investment.

1. Understand ‘at least three years’ — it is not an unconditional guarantee

Article 13 of mainland China’s Regulations on the Administration of Commercial Franchising provides that the franchise term specified in an agreement must be at least three years, unless the franchisee agrees otherwise. It also states that this requirement does not apply when the franchisor and franchisee renew their agreement.

For an initial franchise agreement, this is a rule with an exception. It does not mean that every one-year contract is unlawful, or that signing a one-year agreement automatically gives you three years. If a brand proposes a shorter term, ask why and decide whether you are willing to accept it, rather than treating the statutory principle as a guarantee that the term will be extended later.

Pay particular attention to arrangements described as a ‘one-year trial partnership’ or ‘annual authorisation’. If the contract clearly specifies one year and you sign it, you cannot rely solely on the law’s three-year provision to establish that you did not agree to a shorter term if a dispute arises. Whether the shorter term is valid, and whether it was adequately brought to your attention and explained, will still depend on the wording and the signing process.

A three-year term is not a guarantee of three years’ earnings, nor does it mean that the franchisee can leave at will after one year. The operating term, termination rights and financial risks are separate issues and should be reviewed separately.

2. Separate the key dates to calculate your usable trading time

Article 11 of the Regulations on the Administration of Commercial Franchising requires a written agreement to include key provisions covering the scope and duration of the franchise, fees and payment methods. When reviewing the agreement, list at least the following dates separately:

• Contract effective date: When the parties’ obligations to pay, prepare for opening and provide support begin.
• Brand authorisation start date: When you may begin using the trade marks, systems and other business resources under the agreement.
• Operating term expiry date: When you must stop using the relevant rights. A vague reference to ‘three years of cooperation’ is not enough.

Compare the official opening date with all three. For example, if the term runs from the date of signing, fitting out the premises, training and the soft opening may consume part of it. If preparations are delayed, the contract will not normally be extended automatically simply because the outlet has not yet opened.

Before signing, ask the brand for a timetable showing the expected dates for signing, delivery of resources, preparation, the soft opening and the official opening. Then ensure that the rule for calculating the term is written into the contract. If the term runs ‘from opening’, clarify whether a soft opening counts, which records will establish the date and how both parties will confirm it.

Also address authorisation during the preparation period. If formal authorisation only begins on opening, the agreement should state whether you may use the brand for shopfront signage, soft-opening publicity and system testing beforehand. This avoids a gap in which you are allowed to prepare but lack the necessary usage rights.

3. Set rules for delays, not just an opening target

Once the start date is clear, the agreement also needs to explain what happens if dates change. It is advisable to distinguish delays by cause, rather than simply stating that the franchisee is responsible for every failure to open on time.

Separate notification, remedial and term-adjustment mechanisms can be agreed for the brand’s failure to supply essential resources as promised, delays in the franchisee’s own preparations, and circumstances beyond either party’s reasonable control. There should be a method for determining whether the term is paused, how many days it is extended by and how any recurring fees already paid are treated. These are contractual arrangements to negotiate: not every delay automatically entitles you to an extension by law.

Watch for two opposing risks. First, the term may keep running from signing even though the brand has not provided the agreed support. Second, the term may run from opening but have no final opening deadline, leaving both parties in a prolonged preparation period in which expenditure keeps rising while the term has yet to begin.

A safer approach is to agree a final preparation deadline, a deadline for written notice of delays and a period for putting matters right. If trading still cannot begin by the agreed point, specify whether the agreement may be terminated and how payments and outstanding amounts will be settled. Negotiate these milestones around the actual preparation required rather than simply copying dates suggested verbally by the brand’s franchise sales team.

4. Check payment cycles — ‘paid annually’ does not mean ‘renewed annually’

Spreading fees over three years does not mean you are free to end the agreement each year. Equally, paying three years’ fees upfront does not mean they must all be refunded whenever the agreement is terminated. Payment arrangements only answer the question of when money is due; they do not replace provisions on the authorisation period or the consequences of termination.

Ask the brand to explain the service period covered by each franchise fee, system usage fee and other recurring charge. If different fees have different start dates, check whether ongoing charges begin before the outlet has received the essential resources it needs to operate.

You can create a one-page checklist with entries for the ‘authorisation period, service period, charging period, payment dates and treatment on early termination’. In particular, check whether a quotation describing ‘three years of cooperation’ matches a contract granting only ‘one year of authorisation’. If the brand says subsequent years require a separate review, do not count those unconfirmed years as already secured.

Base your investment assessment on the operating period expressly granted in the contract. Do not extend your financial projections on the strength of verbal assurances that franchisees ‘can usually carry on’. If a short-term agreement is your only acceptable option, also consider whether the non-recoverable investment is too high, rather than relying on a new authorisation being granted when the term expires.

Practical takeaway: Before signing, mark the contract’s effective date, preparation-stage authorisation, official opening and authorisation expiry on a calendar. Then align the delay provisions and charging periods with those dates. What matters is not simply how many years the contract promises, but when those years begin, which periods you can actually trade in and who bears the cost of lost time.