Franchise Territory Protection in China: Agree Boundaries, Online Orders and New Outlet Restrictions Before Signing

When choosing a franchise brand, the promise that ‘no second outlet will open nearby’ can be compelling. Yet distances on a map, the territory authorised in the contract and delivery zones on online platforms may be quite different. Within a franchise network, clear territorial protection helps franchisees assess their investment and reduces internal disputes as the brand expands. The key is not simply hearing the word ‘exclusive’, but establishing who is prohibited from doing what, and where.

1. Distinguish permission to operate from territorial exclusivity

Commercial franchising in mainland China is governed by the Regulations on the Administration of Commercial Franchising, while performance of the contract is also subject to the Civil Code of the People’s Republic of China. The Regulations require franchise agreements to be made in writing, but they do not give every franchisee a protected trading area of a standard radius, nor do they prescribe a minimum distance between outlets of the same brand.

Being ‘authorised to operate in a particular district’ therefore does not usually establish, on its own, that the franchisor cannot add outlets there. Confirm separately where you may open, whether the franchisor may open company-owned outlets nearby, whether it may authorise other franchisees, and whether it reserves any special sales channels.

The Measures for the Administration of Information Disclosure in Commercial Franchising require disclosure of information including the number of franchisees in China, their geographical distribution and their authorised territories. This can help you check the brand’s network, but it is no substitute for your own exclusivity clauses. Before signing, compare the recruitment team’s verbal promises against the contract point by point. If ‘exclusive’ and ‘non-exclusive’ provisions conflict, have them amended before paying.

2. Put verifiable boundaries in a contract schedule

Simply stating ‘within three kilometres of the outlet’ can still lead to disputes. Is the distance measured in a straight line or by road? Does it start at the shop entrance or the centre of the shopping centre? Does protection extend across rivers or streets?

Ask for a territorial schedule agreed by both parties, covering at least:

• Geographical boundaries: Define these using the outlet’s address, coordinates, an area enclosed by named roads or an annotated map. Specify which takes precedence if the descriptions conflict.
• Outlet types: State whether restrictions cover company-owned outlets, franchised outlets, jointly operated outlets, kiosks, pop-ups and delivery-only sites.
• Exceptions: List existing outlets, projects already authorised but not yet open, and special locations such as airports and railway stations. Do not accept a blanket exception for ‘special channels’.
• Protection period: Specify whether protection starts on signing, securing the premises or opening, so that a competing outlet cannot appear while yours is being fitted out.

If the franchisor promises only not to open its own outlets, without restricting its ability to authorise other operators, the protection may be ineffective. Also agree how the franchisor will manage affiliated entities and authorised operators, rather than merely stating that ‘head office must not open an outlet’.

3. Agree online order arrangements and conditions for additional outlets separately

A physical trading area does not automatically define an online delivery zone. Even without a new shopfront nearby, another outlet of the same brand may deliver into your territory, a company-operated online shop may take orders, or group-buying orders may be diverted elsewhere.

Before signing, ask whether territorial protection covers takeaway delivery sites, how local group-buying orders received by head office will be allocated, and whether other outlets may actively target advertising at customers in the protected area. Where platforms allocate orders automatically or consumers choose outlets themselves, establish which factors are outside the franchisor’s control.

The contract should distinguish between authorisations, company-owned outlet locations and marketing arrangements that the franchisor can control, and order flows arising from platform rules. Do not assume that a promise to assign ‘all orders within the territory to this outlet’ can necessarily be delivered. Equally, do not accept unrestricted online operations without assessing their likely impact.

Some brands make protection conditional on turnover, opening deadlines or service assessments. In these cases, specify the assessment criteria, data sources, time allowed to remedy shortcomings and procedure for challenging an assessment. State separately whether failure to meet targets will result in a smaller territory, loss of exclusivity or permission for additional outlets. This helps prevent the scope of protection from changing at head office’s sole discretion.

4. Plan checks and remedies for breach in advance

Before signing, cross-check the disclosed outlet distribution against mapping platforms, the brand’s mini-program app and site visits. Platform information may be out of date. If you identify a possible new outlet, ask the franchisor to confirm in writing its address, authorisation date, operating format and whether it falls within an agreed exception. Keep the reply alongside the territorial schedule and messages exchanged with the franchise recruitment team.

The contract should also set out the franchisor’s duty to notify you of proposed additional outlets near the boundary, how you can raise objections and what happens while a dispute is unresolved. Negotiable remedies include stopping further authorisations that breach the agreement, requiring corrective action within a specified period, reducing or waiving specified fees, and providing for termination and responsibility for losses in the event of a serious breach. These are not standard compensation arrangements automatically granted by law.

If a dispute arises, distinguish a breach by the franchisor from ordinary fluctuations in customer traffic. Retain evidence of the new outlet’s opening date, location, operating format and authorisation, together with your own trading records. A fall in turnover alone will generally not prove that all losses were caused by the additional outlet. Nor should you stop paying contractual fees without first assessing the implications.

Practical takeaway: Before paying, obtain a territory map agreed by both parties, a list of channel and outlet exceptions, and a workable set of remedies. If the franchisor will not put ‘exclusive protection’ into the contract, do not treat it as a guaranteed benefit in your investment projections.