Sub-franchising in China: Check Authorisation and Head Office Responsibilities Before Signing with a Regional Agent

Once you have chosen a franchise brand, the party negotiating with you, signing the agreement and collecting your payment may be a local ‘regional agent’, rather than the brand’s head office. This structure is fairly common in franchising, but the title of agent does not establish a right to grant sub-franchises. This guide focuses on sub-franchising in mainland China: how to assess what a regional company can promise, and whether changes in its relationship with head office could affect your outlet.

1. Establish the regional company’s actual role

‘Master agent’, ‘city partner’ and ‘regional operations centre’ are commercial labels. They do not, on their own, establish the legal relationship. Before signing, ask the company to explain in writing which arrangement applies:

• Franchise recruitment introducer: introduces prospective franchisees, but your franchise agreement is signed directly with head office.
• Authorised agent: signs on behalf of head office within the scope of its authority. Check that authority and establish which party the agreement ultimately binds.
• Sub-franchisor: has received upstream authority to grant sub-franchises, enters into a franchise agreement with you in its own name and assumes the corresponding obligations.

Permission to open several outlets in a particular area does not mean a regional company can recruit other franchisees. Nor do exclusive territorial operating rights automatically include the right to grant sub-franchises.

Draw up a table identifying the franchisor named in the agreement, the company whose official seal appears on it, the payment recipient, the invoice issuer and the service provider. Differences do not necessarily indicate illegality, but each should have a documented basis. In particular, if you are paying the regional company while signing with head office, first obtain explicit authorisation from head office for the company to collect payment, together with confirmation of how that payment will be attributed.

2. Check upstream authority and the regional company’s own obligations

Ask to see the agreement and annexes between head office and the regional company that cover sub-franchising rights. Focus on the authorised territory, applicable business formats, duration, permission to sign in its own name and whether head office must approve each new franchised outlet individually. Verify these points using independently confirmed contact details for head office, rather than relying solely on screenshots forwarded by recruitment staff.

If the upstream agreement contains trade secrets, request the necessary extracts from the relevant clauses, supported by written confirmation of authority from head office. Confidentiality is not a substitute for explaining the key facts about authorisation.

Mainland China’s Regulations on the Administration of Commercial Franchising impose specific requirements on franchisors. If the regional company offers you a franchise in its own name, a statement that ‘head office is already compliant’ is no reason to skip checks on the company itself. Verify its eligibility as a corporate entity, its authorisation to use the relevant business resources, its proven business model and its capacity to provide ongoing support. Also check whether, and how, it meets requirements such as the ‘two directly operated outlets for at least one year’ rule and filing with the commerce authorities. Head office’s franchise filing is not the regional company’s filing, nor is it a guarantee of your investment.

The Regulations also require franchisors to provide the prescribed information and the agreement text in writing at least 30 days before the agreement is concluded. A regional company assuming franchisor obligations towards you must make the corresponding disclosures required by law, rather than simply hand over a head office brochure. Where evidence of directly operated outlets involves complex arrangements with affiliated companies, seek professional verification. Do not simply count head office’s outlets as the regional company’s own.

3. Make head office support a written, enforceable commitment

‘Head office handles training; the regional company handles operations’ may sound like a clear division of responsibilities. When problems arise, however, each may try to pass responsibility to the other. Before signing, draw up a schedule of responsibilities covering at least:

• Who activates accounts for ordering, point-of-sale and operational systems;
• Who provides pre-opening training, ongoing guidance and technical support;
• Who has authority to approve the outlet’s use of brand assets;
• Who collects each fee and handles refunds for unfulfilled obligations;
• Who steps in if the regional company cannot provide services.

The Regulations require franchisors to provide ongoing operational guidance, technical support, business training and other services as agreed. A regional company is not automatically relieved of its contractual responsibilities to you merely because it relies on head office for resources.

Equally, owning the brand does not automatically make head office liable for all the regional company’s debts. If your investment decision depends on direct support from head office, seek a three-party agreement or specific undertaking signed by head office. It should define the services, the circumstances that trigger them, performance deadlines and liability for breach. General wording such as ‘head office supports this project’ is no substitute for clear obligations.

4. Agree in advance what happens if upstream authorisation ends

One easily overlooked risk is that the regional company’s upstream authorisation may expire before your franchise agreement does, or be terminated for unpaid fees or another breach. Compare the terms of both agreements. Do not rely on assurances that renewal is ‘certain’ when paying fees covering a lengthy period.

When negotiating the agreement, propose the following arrangements and seek confirmation from all relevant parties:

1. The regional company must notify you within an agreed period after receiving notice of termination, non-renewal or restrictions on its upstream authorisation.
2. The agreement should state whether head office is willing to take over the franchise relationship directly if upstream authorisation changes, on what terms and whether additional fees would apply.
3. It should explain how fees already paid, advance payments and outstanding services will be reconciled, and who must provide refunds or continue performance.
4. If the relationship cannot continue, it should coordinate system deactivation, cessation of brand use and any transition period, while allocating responsibility for the resulting losses.

A unilateral promise by the regional company that ‘head office will take over unconditionally’ does not automatically bind head office. Nor does termination of the upstream agreement mean that your agreement will necessarily be dealt with automatically in one particular way. The outcome must be assessed against the scope of authorisation, the contractual terms and the circumstances of performance. Do not assume you can continue using the brand indefinitely.

Practical takeaway: Before paying, obtain three things: clear evidence of sub-franchising authority, a precise schedule of contractual responsibilities and a plan for any interruption to that authority confirmed by the relevant parties. Buying a franchise means checking not only who permits you to open an outlet, but also who is obliged to keep the relationship working.