Franchise Marketing Fees in China: Agree How Funds Are Used, Reported and Carried Forward Before Signing

When joining a franchise network in China, prospective franchisees often compare initial franchise fees carefully but overlook ongoing marketing fees, brand promotion charges or advertising fund contributions. These charges may apply throughout the contract term, yet ‘centralised promotion’ does not mean every outlet will receive equal exposure. Before signing, the priority is not simply to ask whether head office will run adverts, but to put in writing how the money will be collected, spent and accounted for.

1. Distinguish marketing fees from head office’s general revenue

Mainland China has specific rules governing franchising. Article 17 of the Regulations on the Administration of Commercial Franchising requires franchisors to use promotion and advertising fees collected from franchisees for the purposes agreed in the contract, and to disclose their use to franchisees in a timely manner.

This means franchisees should not merely be obliged to pay: they should also receive information about how the fees are used. However, the provision does not prescribe specific arrangements such as monthly reports, transaction-by-transaction access to accounts or independent audits. Practical verification arrangements need to be agreed in the contract; they should not be treated as an unlimited statutory right to inspect the books.

First, ask the franchisor to list the following charges separately:

• Central marketing fees: for brand-wide advertising, campaign planning or promotional materials.
• Outlet-specific promotion fees: for opening events, local advertising or services supporting an individual outlet’s operations.
• Promotional costs borne directly by the outlet: including voucher discounts, giveaways and delivery subsidies.

In particular, clarify whether head office will still require outlets to join additional paid campaigns after collecting marketing fees. Could a single campaign involve service charges, advertising placement fees and discounts funded by the outlet?

2. Put the fee formula and permitted spending in a contract schedule

Do not settle for wording that merely says fees are ‘based on turnover’. Is turnover calculated using the amount customers actually pay, the original order value or the amount settled by a platform? How are refunds, cancelled orders, platform subsidies, prepaid account top-ups and subsequent spending treated? Without clear definitions, an outlet could incur fees before receiving revenue, or even be charged twice.

Ask for a schedule setting out the calculation basis, reconciliation cycle, payment dates and process for resolving discrepancies. If there is both a fixed minimum charge and a turnover-based fee, specify whether they are added together or whether only the higher amount is payable, and how fees are calculated during periods of closure.

Permitted uses should also be specific. Agree separately whether the fund may cover national brand advertising, local customer acquisition, content production, agency services and head office staff costs. Advertising aimed at recruiting prospective franchisees serves a different purpose from consumer-facing brand promotion and should not simply be bundled into the same budget.

If a company connected to head office provides promotional services, ask for disclosure of the relationship, the services supplied and the basis for pricing. A related-party transaction does not necessarily mean a charge is unreasonable, but it should be possible to explain what services were actually delivered.

3. Agree on spending reports that are clear and verifiable

Article 21 of the Regulations on the Administration of Commercial Franchising requires franchisors to provide specified information and the contract text in writing at least 30 days before the contract is signed. The Measures for the Administration of Information Disclosure in Commercial Franchising set out further disclosure requirements, including those relating to fees. For marketing fees, do not just confirm the rate: ask for a sample spending report to assess whether the information you will receive is sufficient to check how the money has been used.

Set out the reporting frequency, delivery method and minimum content in the contract. For example, quarterly reports could include:

• Total fees collected, total expenditure and the closing balance for the period;
• Major projects, advertising channels, service periods and coverage;
• Spending categories, such as production costs, media placement fees and agency fees;
• Verifiable evidence of advertising placements or supporting summaries, together with the basis used to calculate performance metrics.

To protect other outlets’ information and commercial confidentiality, reporting can use aggregated or anonymised data, or third-party verification. For unusual items, the contract could require franchisees to submit written questions first, with head office responding within an agreed period. If a dispute remains, a targeted review could then be triggered under the contract, with responsibility for its costs clearly allocated.

Remember that advertising impressions do not equal sales, and promotional coverage does not guarantee returns. A national campaign that generates no direct orders for a particular outlet is not automatically a breach of contract. The key questions remain whether the agreed purposes were observed, whether the services were actually delivered and whether disclosure was sufficient.

4. Plan ahead for unused funds and disputes

Before signing, establish whether unspent annual balances can be carried forward, whether their use can be changed, what happens when the contract ends, and how advertising commitments that have not yet been paid will be settled. Do not assume that every unused balance must be refunded, but equally, do not accept that head office need never account for it.

For prepaid, outlet-specific promotion fees, agree separate terms covering cancelled campaigns, outlets that fail to open and services that are not delivered. Specify which actual expenses may be deducted, which remaining sums must be refunded, and what supporting documents and settlement deadlines apply.

If head office fails to provide reports, first send a formal written request under the contract. Keep payment records, a list of missing report information and all relevant correspondence. Suspected breaches of requirements on the use or disclosure of promotion and advertising fees can be raised with the relevant commerce authority. Refunds, compensation or termination, however, require an assessment of the contract terms, the seriousness of the breach and the evidence; seek legal advice where necessary. Do not simply stop paying all fees without assessing the risks, as this could create a further dispute over breach of contract.

Practical takeaway: Before signing, prepare a marketing fee checklist covering ‘calculation basis, permitted uses, report content, verification procedures and treatment of unused balances’. A healthy franchise network needs shared investment, but every shared contribution also needs clear rules and an explanation of how it is used.