Before Franchising in China: How to Tell Whether a Brand Partnership Is a Franchise

When expanding an existing business into other cities in China, a company may initially launch ‘brand partner outlets’, ‘technical partner outlets’ or ‘authorised dealerships’, leaving franchise compliance until the network grows. But whether an arrangement constitutes commercial franchising cannot be determined by the agreement’s title alone. For businesses preparing to build a franchise network, the first step should be to examine how the arrangement actually works. This helps avoid running what is effectively a franchise while managing it as an ordinary supply relationship.

1. Assess the three elements, not the contract title

China has specific rules governing commercial franchising. Article 3 of the Regulations on the Administration of Commercial Franchising sets out its basic structure: an enterprise contractually licenses business resources it owns to another operator, which conducts business under an agreed uniform operating model and pays franchise fees to the enterprise.

For review purposes, this structure can be broken down into three questions:

• Are business resources being licensed? Look beyond registered trade marks to resources such as business logos, patents and proprietary know-how. Permission to use brand imagery, recipes or operating techniques should all fall within the review.
• Is a uniform operating model required? Consider whether the partner must follow the product range, service procedures, outlet design and management requirements set by head office. A single brand standard may not be enough to determine the arrangement’s legal nature; the overall degree of control needs to be assessed.
• Are franchise fees being paid for the arrangement? Examine not only explicitly labelled franchise fees, but also the rights or services that other payments actually purchase.

The Regulations also make clear that organisations other than enterprises, and individuals, may not act as franchisors. If an individual currently grants the rights, changing the contract’s title will not resolve the issue of whether that person is legally eligible to act as the franchisor.

2. Examine licensing, management and payments together

Prepare a ‘partnership fact sheet’, linking each fact to specific evidence rather than relying solely on the recruitment team’s description of the model.

For licensing, record who grants rights to whom, what is licensed, where and how it may be used, and whether the partner can operate independently under its own brand. Relevant evidence includes contract schedules, shopfront signage designs, system account permissions and photographs of actual outlets.

For management, record whether head office can enforce operating procedures, whether it determines core service standards and what happens if the partner does not comply. Alongside the main contract, review training notices, operating rules, ordering-system requirements and day-to-day communications.

For payments, record whom the partner pays, why payments are made, whether they recur and which rights would be lost through non-payment. In particular, explain how training fees, system access fees and technical service fees relate to brand use and the uniform operating arrangements.

The absence of a separately listed franchise fee does not mean there are no franchise fees; equally, a margin on goods supplied does not automatically make an arrangement a franchise. For example, a margin arising from an ordinary sale of goods may differ in nature from a charge incurred to join a uniform operating system. Legal professionals should assess the purpose of the transaction, pricing arrangements and actual performance. Not every payment for goods should automatically be treated as a franchise fee.

3. Distinguish ordinary distribution, standalone licensing and franchising

Ordinary distribution generally centres on the purchase and resale of goods. A distributor may have to comply with product display or trade mark usage requirements. However, if it independently determines how to run its business and does not join the authorising party’s uniform operating model, selling goods under the same brand is not, by itself, enough to establish a franchise relationship.

A standalone trade mark licence primarily governs permission to use a mark. If it also comes with a complete outlet operating model, ongoing operational restrictions and related fees, further review is needed to establish whether the arrangement goes beyond a simple licence.

For example, the assessment will clearly differ between a business that supplies independent retailers and merely prohibits alterations to packaging, and one that requires partner outlets to use uniform signage, service procedures and operating systems while charging for the overall operating arrangement. These are illustrative review scenarios, not legal conclusions that can be applied automatically.

Also check for ‘split contracting’: a brand company signs the licence agreement, an affiliated company collects technical service fees and a supply company provides the goods. The overall relationship cannot be ruled out as a franchise simply because each agreement contains only one of the relevant elements. The responsibilities, financial benefits and actual co-operation of all the parties should be reviewed together by legal professionals.

4. Make the assessment a decision point before recruiting partners

If the review indicates that the proposed arrangement is a franchise, prepare under the applicable rules before recruiting partners, rather than recruiting first and completing the paperwork later. Article 7 of the Regulations requires a franchisor to have a mature operating model and the ability to provide ongoing guidance, technical support, training and other services. It must also have at least two directly operated outlets that have been operating for more than one year.

Pre-contract disclosure obligations also apply. These are set out in the Regulations and the Measures for the Administration of Information Disclosure in Commercial Franchising. The Regulations require the franchisor to provide the prescribed information and the franchise contract text in writing at least 30 days before signing. After entering into its first franchise agreement, the franchisor must also apply for the required filing within 15 days. Filing is not a substitute for meeting eligibility and disclosure requirements before signing.

For existing partnerships, first compile the relevant versions of agreements, payment records and evidence of actual operations. Then assess whether future recruitment needs to change, outstanding obligations need to be fulfilled or existing relationships need to be addressed. Do not backdate documents or treat a subsequently signed ‘non-franchise declaration’ as a compliance remedy.

Where the nature of a model remains uncertain, consider an internal pause: until legal review is complete, do not introduce new versions of agreements, collect payments connected with the proposed grant of rights or promise outlet opening dates. This is a risk-management recommendation, not a standard procedure prescribed by law.

Practical takeaway: Before recruiting partners, bring the licensed rights, operational restrictions, fee arrangements and actual practices together in a single fact sheet. Establish the legal nature of the relationship before deciding on contracts and compliance steps. This creates a clear, credible foundation for a franchise network.