Transferring a Franchise Business in China: Agree Approval, Buyer Requirements and the Outgoing Owner’s Liability Before Signing

When buying a franchise business in China, consider not only how to open it, but also whether you will be able to sell it later. Equipment, the lease, brand authorisation and outstanding debts are not a single asset that can simply be handed over as a package. A clear transfer process protects the outgoing owner and helps buyers avoid paying for a business they cannot continue to operate.

1. Distinguish between selling assets, transferring contracts and selling shares

A ‘whole-business transfer’ is merely a description of a transaction, not a substitute for the necessary legal arrangements. Before signing, establish separately who owns the equipment and stock; whether the lease can be transferred or must be replaced; who will take over the franchise agreement; and who will be responsible for customers’ prepaid balances, staff wages and outstanding supplier payments.

Under the Civil Code of the People’s Republic of China, transferring all or part of a contractual obligation to a third party generally requires the creditor’s consent. Transferring contractual rights and obligations together also requires the consent of the other party to the contract. A transfer agreement between the outgoing owner and the buyer therefore does not, by itself, give the buyer authorisation to use the brand or automatically release the outgoing owner from contractual liability to the franchisor.

A share sale is different. If the franchise agreement was signed by the company operating the outlet, selling shares in that company will not usually change the contracting party. However, the agreement may require approval for a change in the controlling shareholder or ultimate controller. Buying the company’s shares also means its existing debts will generally remain within the company, so the transaction’s risks cannot be assessed solely by reference to the value of its equipment.

2. Set out a workable franchisor approval process

China has specific rules governing commercial franchising, including the Regulations on the Administration of Commercial Franchises and the Measures for the Administration of Information Disclosure in Commercial Franchising. However, these do not give franchisees a general right to transfer an entire franchise agreement without consent. Whether a transfer can proceed depends on both the law and the terms of the contract.

Do not settle for a verbal assurance that ‘head office supports transfers in principle’. When acquiring franchise rights, seek to have the following set out in a schedule to the agreement:

• Application documents: Which documents are mandatory, including the buyer’s identification, business experience, proof of funds and training arrangements.
• Assessment criteria: The grounds for refusal, and whether additional training, refurbishment or replacement equipment may be required.
• Response procedure: The deadline for a response once all documents have been submitted, how requests for further documents will be handled, and whether reasons must be given for a refusal.
• Limits on charges: Whether transfer assessment fees, training fees or a fresh franchise fee will be charged, who will pay them, and whether any charges could overlap.

These are negotiable contractual provisions, not all statutory rights. In particular, do not assume that a failure to respond by the deadline amounts to consent. Obtain explicit written confirmation where a buyer is taking over a contract.

3. Establish whether the buyer gets the remaining term or a new franchise grant

The sale price often includes an amount described as ‘brand value’, but the length of time the franchisor will allow the buyer to operate must be checked separately. If the original agreement has one year left, paying the transfer price does not mean the buyer will receive a new, full franchise term.

There are usually two routes: the buyer takes over the existing agreement with the franchisor’s consent, or the existing agreement ends and the buyer signs a new one with the franchisor. The franchise term, fees, territorial arrangements and contractual responsibilities may differ between these routes. Ask the franchisor to confirm in writing which route will apply, rather than relying on the seller’s assurance.

If the buyer enters into a new franchise agreement with the franchisor, the Regulations on the Administration of Commercial Franchises require the franchisor to provide the prescribed disclosure information and a copy of the contract in writing at least 30 days before signing. The fact that the outlet is already trading does not justify reducing the buyer’s contracting process to payment and a change of name. If the buyer is taking over the existing agreement, they should also obtain the original contract, supplementary agreements, records of penalties or required remedial action, and documents showing that fees have been settled. How the disclosure obligations apply should be checked against the specific transaction.

The buyer should also check the remaining lease term, the landlord’s consent and whether relevant operating licences need to be amended or reapplied for. Approval from the franchisor does not mean that the landlord or licensing authority has also approved the transfer.

4. Complete the handover with a three-party agreement and staged payments

A more secure approach is for the franchisor, seller and buyer to sign a three-party agreement specifying when the transfer of franchise rights or the new contract takes effect, and coordinating this with the business handover and lease arrangements. If approval is refused, the buyer should not start trading under the outgoing owner’s name merely on the strength of that owner’s promise.

The outgoing owner particularly needs a clear allocation of liabilities: how franchise fees due before the handover date will be settled, who will assume obligations after handover, and whether the franchisor releases the outgoing owner from future contractual obligations. If the outgoing owner has also given a personal guarantee, its release must be confirmed separately. A change of ownership does not automatically discharge it.

The buyer’s payments can be tied to specific conditions, with instalments payable after written franchisor approval, confirmation of the lease arrangements, contract signing, and completion of the stocktake and handover. The agreement should explain how payments will be refunded if conditions are not met, and who will bear reasonable costs already incurred.

Prepare an itemised list of customer account balances, outstanding after-sales orders and debts. An agreement between the seller and buyer that the buyer will take these on does not automatically release the outgoing owner from liability to consumers or other creditors. Any items requiring third-party consent or separate formalities should be dealt with individually.

Practical takeaway: Before buying a franchise business, put in writing who can take it over, whose approval is needed, what must be paid and when the outgoing owner is released from liability. A transfer is not simply a handover of keys: the written documents must properly coordinate the transfer of assets, brand authorisation and contractual responsibilities.