Multi-Unit Franchising in China: Agree Opening Targets, Extensions and Scale-Back Options Before Signing

When exploring franchising in China, some entrepreneurs are told that signing for several outlets at once offers better terms than signing for each individually. The key question is not simply how much you save per outlet, but whether you are committing to an opening schedule that leaves no room for adjustment. Under a multi-unit agreement, even outlets that have not yet opened can create payment obligations, trigger breaches and put future development rights at risk. This guide focuses on one question: how can you turn multi-unit opening targets into measurable, negotiable contractual commitments?

1. Establish whether you are buying the right to open outlets or accepting an obligation to do so

Labels such as ‘multi-unit partnership’ or ‘area development’ do not tell you the full extent of your responsibilities. Before signing, ask the franchisor to map out the transaction structure: who signs the development agreement, who signs each outlet’s franchise agreement, who pays, who operates the outlets and how the documents relate to one another.

Distinguish between three types of arrangement:

• An option to open outlets: you may apply to open additional outlets within an agreed period, but not applying should not automatically constitute a breach of an opening obligation.
• A binding development commitment: you undertake to open an agreed number of outlets by specified dates. Failure to do so may trigger compensation payments or changes to your development rights.
• The right to appoint other franchisees: as well as opening outlets yourself, you may grant franchise rights to other operators. This involves different authorisation and compliance responsibilities.

Do not read ‘you may open five outlets’ as ‘you must open five outlets’, or assume that the right to develop your own outlets allows you to resell franchise rights. If separate project companies will operate individual outlets, establish in advance whether the franchisor must approve them separately and whether the original signatory remains liable.

Commercial franchising in mainland China is specifically governed by the Regulations on the Administration of Commercial Franchises. Whether an arrangement constitutes a franchise depends on its substance—including the licensing of business resources, a uniform operating model and the payment of fees—not merely the agreement’s title. As a general rule, the franchisor must disclose the legally required information in writing and provide the contract text at least 30 days before the franchise agreement is concluded. The suggestion that ‘outlet agreements will be signed later’ should not be a reason to skip scrutiny of the current agreement’s legal nature and obligations.

2. Break opening targets down into milestones with clear prerequisites

‘Two outlets a year’ may sound precise, but it can still lead to disputes. Does the assessment year begin when the agreement is signed, when the franchisor approves a site or when the first outlet opens? Does completion mean finishing the fit-out, starting a soft opening or obtaining the necessary licences and permits?

Prepare a development schedule as an annex to the agreement, listing the following for each planned outlet:

• The start date for measuring progress, the completion deadline and how completion will be confirmed;
• The documents required for site submissions and the franchisor’s review deadlines;
• Each party’s deliverables for design, equipment, training and other preparations;
• The licences and permits needed to open, and who is responsible for obtaining them;
• Notification requirements, supporting evidence and the procedure for adjusting the schedule if progress is obstructed.

Link the franchisor’s support obligations to your opening obligations. For example, require the franchisor to respond in writing within a contractually defined period after receiving a complete submission. Any actual delay caused by its late review should extend the relevant milestones as agreed. Do not settle for ‘the parties will negotiate amicably’ without specifying how compliance with targets will be assessed while those discussions are ongoing.

Failed lease negotiations, ordinary recruitment difficulties or insufficient working capital do not automatically constitute force majeure. If you want an entitlement to an extension, specify the qualifying circumstances in the contract rather than looking for grounds to excuse a delay after it occurs. Keep review emails, submission records and follow-up notices to demonstrate the cause of the delay and the number of days affected.

3. Make the consequences of missed targets graduated, rather than allowing them to affect every outlet

One of the biggest risks in a multi-unit agreement is that a late opening at one new outlet could trigger termination of all operating outlets’ agreements, make all fees immediately payable or retrospectively cancel every discount. Such consequences may be far out of proportion to the actual impact of missing a single milestone.

Propose a graduated approach: first a written warning, followed by a period to remedy the breach. If the target still cannot be met, the first response should be to reduce unused development allocations or adjust future development rights. Seek an express provision allowing the agreements for existing outlets that are meeting their obligations to remain in force independently.

Pay particular attention to ‘cross-default’ clauses: does a breach of one agreement automatically constitute a breach of others? If the franchisor insists on retaining such a clause, limit the triggering events, the required level of seriousness, the notification procedure and the period allowed to remedy the breach. A minor delay should not set off a chain reaction.

The Regulations on the Administration of Commercial Franchises require contracts to address liability for breach, variation, rescission and termination, among other matters. They do not, however, impose a standard multi-unit development schedule or a uniform set of penalties for missed targets. These arrangements must be negotiated before signing. The Civil Code of the People’s Republic of China allows a party to request an appropriate reduction in agreed damages that are excessively higher than the loss suffered. Whether a reduction is granted depends on the facts; the possibility of a future adjustment is not a sound reason to accept excessive liability now.

Also distinguish between the company’s development obligations and any guarantee given by an investor personally. If a signature block identifies you as a ‘guarantor’, assess the guarantee’s scope, form and duration separately. Do not treat it merely as confirmation of your identity.

4. Agree pause and scale-back options, and charge fees outlet by outlet

A more prudent multi-unit arrangement allows you to test the first outlet before deciding whether to proceed to the next stage. Seek business review milestones at which the parties confirm in writing whether to continue development or adjust the plan, taking account of actual cash flow, staffing and the franchisor’s delivery of support. The contract should make clear that this is an agreed adjustment mechanism—not a right for the franchisee to stop opening outlets unilaterally without liability.

Fees should also follow the development stages. Ask the franchisor to distinguish between development rights fees, individual outlet franchise fees and fees for specific services. Specify payment milestones, how payments will be credited against other fees and what happens to sums relating to unopened outlets. If a discount depends on all outlets opening on time, obtain a clear formula for any additional amount payable. Confirm whether it applies only to unopened outlets or also requires top-up payments for those already operating.

The term of the development agreement should not be used ambiguously as a substitute for each outlet’s operating term. Under the Regulations on the Administration of Commercial Franchises, a franchise term should generally be at least three years unless the franchisee agrees otherwise; this rule does not apply to renewals. Check when each outlet’s term begins so that the last outlet to open is not left with only a short period in which to operate under the franchise rights.

Practical takeaway: Before signing a multi-unit agreement, prepare at least three tables: an outlet-by-outlet development schedule, a stage-by-stage fee schedule and a table of consequences for missed targets. Gaps in these tables should not be filled by verbal promises from franchise sales representatives. Before making any payment, have a lawyer familiar with franchising review any clauses involving termination across all outlets or personal guarantees.