Franchise Advertising in China: Spotting Earnings Promises and Misleading Claims

When choosing a franchise, it is often not the contract that causes investors to let their guard down, but the “successful outlets” and earnings promises presented by the recruitment team. For prospective franchisees, the key is not to seek more detailed promises, but to identify which claims should not be made in the first place, which facts can be verified, and what remedies may be available after signing on the basis of misleading information. This article focuses on earnings claims and false statements in franchise recruitment in mainland China.

1. A disclaimer does not make earnings advertising compliant

Article 17 of China’s Regulations on the Administration of Commercial Franchising prohibits franchisors from engaging in deceptive or misleading promotional activities. It also prohibits their advertisements from containing claims about franchisees’ earnings from operating the franchise. Statements such as “earn this much net profit each month” or “recover your investment within a few months” therefore raise more than a question of forecast accuracy: the advertising content itself may breach the rules.

Disclaimers such as “figures are for reference only” or “actual earnings vary” do not automatically remove that risk. Even if a featured outlet genuinely makes a profit, this does not mean the franchisor may use franchise earnings as an advertising selling point. Whether particular promotional material constitutes advertising, and whether it is deceptive or misleading, must still be assessed in light of its format, content and distribution.

It is also important to distinguish franchise recruitment advertising from pre-contract information disclosure. China’s Measures for the Administration of Information Disclosure in Commercial Franchising require disclosure of information about existing franchisees in China, including assessments of their actual business performance. Providing business information as required by law is not the same as being permitted to advertise guaranteed returns to prospective investors. Do not refuse to examine operating information simply because an advertisement is problematic, or assume that receiving disclosure documents makes the advertising compliant.

2. Break “success stories” down into verifiable facts

When listening to a recruitment representative’s pitch, focus on three questions rather than simply asking for more screenshots of sales figures:

• Which outlet are they talking about? Ask for its address, operating entity and opening date, and whether it is company-owned or franchised. Group revenue must not be presented as an individual outlet’s performance, nor should a company-owned showcase outlet be portrayed as representative of ordinary franchisees’ results.
• What do the figures represent? Turnover, platform transaction value, gross profit and net profit are different measures. Ask whether refunds, promotional subsidies, rent, staffing costs and franchise-related fees have been deducted. A “net earnings” figure with no clear calculation basis should not guide your investment decision.
• How was the sample selected? Showing only the best-performing outlets may conceal the experience of new, closed or loss-making businesses. Ask about the period covered, the sample and the selection method. Be wary of short-term promotional results being presented as evidence of sustainable business performance.

With the relevant operators’ consent, speak to existing franchisees, focusing on whether the recruitment claims match their actual experience. A refusal to provide an outlet’s complete accounts does not necessarily indicate fabrication. However, if a claim remains unsupported by verifiable evidence, exclude it from your reasons for investing.

Above all, distinguish between “we expect this result” and “this has already happened”. A forecast that does not materialise is not necessarily fraudulent. Invented outlets, falsified transaction records and concealed material facts, however, are more likely to have a direct bearing on the decision to sign.

3. If you discover misleading claims, distinguish three routes

Regulatory complaints address unlawful promotion. Suspected unlawful advertising can be reported to the market regulation authorities; issues involving franchise information disclosure can be raised with the commerce authorities. Your complaint should identify the specific claims, who published them and why they are misleading. An administrative penalty does not automatically set aside the contract or secure a refund of franchise fees.

Rescission for fraud addresses contracts entered into through deception. Under the Civil Code of the People’s Republic of China, where one party uses fraud to induce the other to carry out a civil juristic act contrary to their true intentions, the deceived party may ask a people’s court or an arbitration institution to set it aside. This will generally require explaining what the false statement was, why it was significant enough to influence the decision to sign, and how you relied on it. Losses after opening are usually insufficient, on their own, to establish fraud during recruitment.

Disclosure failures may provide grounds for termination. The Regulations on the Administration of Commercial Franchising state that a franchisee may terminate the franchise agreement if the franchisor conceals relevant information or provides false information. Whether the conditions for termination are met, how notice should be given and what sums may be refunded still depend on the importance of the information, performance of the contract and the evidence. Not every minor error justifies a full refund.

4. Take the right steps, in the right order

First, stop making further investments in reliance on the disputed claims. However, do not stop all contractual payments or close the business without assessing the consequences, as this could create a separate dispute over breach of contract. Preserve original advertisements, complete chat records, recruitment materials and proof of payment. Record when you saw each claim, when you signed and when you discovered the inaccuracies. An isolated screenshot of one sentence will often fail to capture the context.

Next, send a written request for clarification to the entity with which you signed the agreement, asking it to explain the specific facts and supporting evidence. If you are considering rescission, termination or a damages claim, promptly ask a lawyer familiar with franchise disputes to review the contract and materials. The Civil Code imposes time limits on the right to seek rescission for fraud: it must generally be exercised within one year of the date you knew, or should have known, of the grounds for rescission, subject to an overall limit of five years from the date of the act. Do not assume that ongoing negotiations or a regulatory complaint will automatically preserve your rights within those deadlines.

The return of property and allocation of losses after a contract is set aside are not exactly the same as the financial settlement following termination. Resources already used, services actually received and each party’s fault may all affect the outcome. Discovering false advertising does not necessarily mean that every pound invested can be recovered.

Practical takeaway: Do not treat earnings advertising as a guarantee, or business failure as automatic proof of fraud. Verify the facts before signing. If you discover misleading claims, promptly distinguish regulatory complaints from contractual remedies. These are effective ways to protect yourself and support integrity within the franchise community.