Before Franchising in China: Setting Up Site Approval and Allocating Lease Risks

When a business develops a franchise network in China, it can easily overlook a sequencing problem: the franchisee pays a rental deposit before head office assesses whether the premises are suitable. Even if footfall, space or handover conditions subsequently prove unsuitable, sunk costs may push the parties towards opening anyway. Before launching a franchise operation, establish a process for site approval and allocating lease risks. Treat “worth investigating”, “ready to sign the lease” and “ready to trade” as separate decisions.

1. Turn company-owned outlet experience into site criteria, rather than copying locations

Article 7 of China’s Regulations on the Administration of Commercial Franchising requires franchisors to have a mature business model and the ability to provide ongoing operational guidance, technical support, business training and related services. Site assessment can form part of operational guidance, but the regulations do not prescribe a standard site-scoring system. Businesses should develop criteria suited to their own operating model, without presenting internal recommendations as statutory requirements.

Start by reviewing company-owned outlets: why do customers visit, when does most spending occur, and does the business rely on passing trade, destination visits or delivery orders? Divide the resulting criteria into three categories:

• Essential requirements: conditions without which the established model cannot operate, such as the space, power supply or drainage needed for equipment.
• Suitability factors: conditions that affect performance but can be assessed using evidence, such as the customer profile, visibility and transport access.
• Matters requiring verification: conditions that cannot be confirmed solely through verbal assurances from an agent or landlord, such as permission for alterations and the agreed condition of the premises at handover.

Do not settle for conclusions such as “good catchment area” or “excellent location”. Record the evidence behind each judgement, the date of verification, who carried it out and any unresolved issues. Untested site formats should be treated as pilot projects, rather than marketed to prospective franchisees as established outlet formats.

2. Introduce approval stages before the lease is signed

A useful process has three stages: an initial document review, an on-site assessment and a written decision. During the initial review, the franchise applicant should submit the location, floor plan, breakdown of rental charges, handover conditions and draft lease. Head office can then rule out clearly unsuitable premises before arranging site visits.

An on-site assessment should involve more than a single observation of peak-time footfall. It should cover different periods relevant to the business model and distinguish between passers-by, target customers and people likely to enter the outlet. It should also record practical issues such as competing outlets, obstructed entrances and loading restrictions. Footfall figures supplied by the landlord may provide useful leads, but should not be treated directly as a basis for revenue projections.

Written decisions can take the form of “approved”, “conditionally approved” or “not approved”. Conditional approval must specify the additional evidence required, remedial action, deadlines and the person responsible for reassessment. For example, if electrical capacity has not been verified, “agreed in principle” is not enough: the decision should state what proof is needed before proceeding.

Process documents should advise applicants not to take on lease commitments they cannot withdraw from before receiving head office’s written decision. If a site genuinely needs to be secured earlier, first clarify the nature of any payment, the withdrawal conditions and who bears any losses. Head office approval should not be described as a guarantee of profitability.

3. Assess site suitability and lease risks separately

A site that suits the business does not necessarily come with a sound lease. Head office may be able to assess whether the layout fits the brand’s operating model, but the landlord’s authority to let the premises, the lease terms and the risks of non-performance still require separate checks, with professional advice where necessary.

Before signing, check at least the following:

• Whether the proposed landlord has authority to let the premises and, where subletting is involved, whether the relevant permissions and restrictions are clear.
• Whether the permitted use, handover condition and fit-out restrictions are compatible with the planned business activities.
• Whether the lease specifies how property management, marketing, energy and other charges beyond rent are calculated and adjusted.
• Whether the rent-free period, handover date and rent commencement date align, and how delayed handover will be handled.
• Whose consent is needed for signage, pipework, cabling and equipment installation, and whether withdrawal is possible if consent is refused.
• Whether the lease term, early termination provisions and obligations to reinstate the premises are consistent with the franchise arrangements.

These are due diligence checks, not licensing decisions that head office can make on behalf of the relevant authorities. Nor should either party assume that terminating the franchise agreement automatically ends the lease: the exit provisions in each contract must be reviewed separately.

4. Put approval authority and cost responsibilities in writing

Article 11 of China’s Regulations on the Administration of Commercial Franchising requires franchise agreements to be in writing and to include, among their principal terms, the specific content and delivery methods of services such as operational guidance. Article 14 requires franchisors to continue providing the relevant services as agreed. If head office promises site selection support, it should therefore define the scope of that service rather than simply state that it will “assist with site selection”.

The agreement or its schedules should specify who searches for premises, who submits the information, whether head office will visit the site, when it will issue a decision, and who pays for site visits and additional reassessments. Head office approval should not replace the franchisee’s own decision on entering into the lease. Equally, disclaimers should not be used to obscure head office’s verification obligations or misrepresentations.

The documents should also define what triggers a fresh assessment. A reduction in floor area, changes to entrances, a revised rental structure or altered handover specifications may invalidate the original decision. Keep the corresponding versions of floor plans, site records, assessment findings and leases so that the parties do not make decisions using different information.

Practical takeaway: Run through the complete process using one prospective site first. Site selection support has a replicable foundation only when the team can explain the basis for approval, which conditions remain unmet, who has authority to approve, and who bears which costs if the proposed lease does not proceed.