How businesses in China can establish turnover verification and reconciliation before franchising

When an established business prepares to launch a franchise network, any plan to charge turnover-based franchise fees should start with an easily overlooked question: do head office and individual outlets mean the same thing by ‘turnover’? Till records, platform orders and bank receipts serve different purposes and cannot simply be used interchangeably. A reliable reconciliation process is not about increasing scrutiny; it enables both sides of the franchise relationship to check how fees have been calculated.

1. Define turnover in the contract first

China has specific regulations governing commercial franchising. Article 11 of the Regulations on the Administration of Commercial Franchising requires the parties to enter into a written contract, with the types, amounts and payment methods of franchise fees among its main terms. Where fees are calculated as a percentage of turnover, the calculation basis should not exist only as a setting in the till system, still less be left to verbal explanations from franchise recruitment staff.

Include a ‘turnover calculation schedule’ as an appendix to the contract, covering at least:

• Recognition point: whether revenue is recognised on payment, delivery or completion of the service.
• Discounts and subsidies: how outlet discounts, head office subsidies and platform subsidies are treated respectively.
• Refunds and cancellations: how refunds are deducted within a settlement period, and when refunds relating to earlier periods are adjusted.
• Platform-related charges: whether commissions, delivery charges and similar costs affect the fee calculation basis.
• Prepaid balances and redemption: whether amounts are counted when customers top up or when they spend the balance, to avoid double counting.
• Tax and special orders: whether figures include or exclude tax, and how free items and internal test orders are identified.

There is no single commercial approach that suits every brand; the parties should expressly agree these points. Turnover used to calculate fees under the contract may also differ from revenue reported in the financial statements. Finance and legal professionals should review the definitions together to avoid conflating them.

2. Test the full data trail in company-owned outlets

Before launching the franchise operation, run a trial covering an entire settlement cycle at selected company-owned outlets. Do not limit testing to a single straightforward payment. Include exceptions such as platform promotions, partial refunds, returns made in a later month and spending from prepaid balances.

Keep three corresponding sets of records: order and refund details; payment and platform settlement records; and fee calculation summaries prepared using the contractual definition of turnover. Orders show what happened in each transaction, settlement records show how funds were received, and fee summaries show how the charges were calculated.

For example, a platform may pay an outlet after deducting commission. If the contract states that commission cannot be deducted from turnover for fee calculation purposes, the amount received in the bank cannot simply be used as the basis for the percentage fee. Head office should be able to show the adjustments linking order values, amounts received and the turnover used to calculate fees.

During the trial, maintain a discrepancy log recording each cause, supporting evidence, the person handling it and the outcome. The aim is not to make every report show identical figures, but to ensure that every difference has a traceable explanation. If only the founder can explain the results, the process is not yet ready to be replicated.

3. Set defined verification rights, not unrestricted access to accounts

Verifying turnover requires data, but this does not mean head office should have unlimited access to outlet records. Article 14 of the Regulations on the Administration of Commercial Franchising requires franchisors to provide an operations manual and ongoing related services as agreed. It does not automatically grant head office unrestricted rights to inspect accounts.

The contract should specify which reports must be submitted, how often, access rights, the circumstances that trigger verification and whether a third party may be appointed to carry it out. The operations manual can then explain file formats, upload procedures and how to handle exceptions. Manual updates should not be used to quietly expand the rights granted under the contract.

Apply the principle of collecting only what is necessary to check the fee calculation. Prioritise order numbers, transaction amounts and refund status rather than personal information such as customer names and mobile numbers. Where personal information is processed, compliance with the Personal Information Protection Law of the People’s Republic of China is also required, including clear purposes, scope and security measures. A franchisee’s agreement cannot be treated as the sole basis for processing customers’ information.

If on-site verification is needed, agree how notice will be given, which records may be inspected, confidentiality obligations and the circumstances in which each party bears the costs. A discrepancy is not proof of concealed revenue. First check for system faults, settlement timing differences and differing interpretations of the turnover definition.

4. Make monthly settlement fully reviewable

A practical sequence is: head office issues a calculation statement; the outlet checks it; both parties resolve discrepancies; settlement is confirmed; and adjustments are recorded and archived. Set contractual deadlines for each stage. The statement should show, at a minimum, the period covered, the applicable turnover definition, adjustments, the fee calculation basis and the amount payable, rather than simply presenting a payment figure.

Agree in advance how disputed amounts will be treated during review, distinguishing undisputed sums from those still being checked. Do not improvise by suspending supplies or system access instead of reconciling the figures. Any additional charges or refunds should be linked to the original settlement period, with adjustment records retained rather than old reports overwritten.

Turnover reporting and verification obligations should also be explained before signing. The Regulations on the Administration of Commercial Franchising require franchisors to provide the prescribed information and the contract text in writing at least 30 days before the contract is concluded. The basis for calculating fees and the related arrangements should be consistent across the disclosure materials and the contract, enabling prospective franchisees to assess the actual financial burden.

Practical takeaway: First complete a settlement using company-owned outlet data that both sides can independently check. Then set out the turnover definition, verification rights and discrepancy-handling rules in the contract. Enabling franchisees to reproduce the same calculation is more reliable than simply asking them to accept head office’s figures.