Choosing the Franchisor and Allocating Group Responsibilities Before Launching a Franchise in China

When an established business prepares to offer franchises in China, it may find that its trademarks belong to the founding company, its company-operated outlets are run by another entity, and its training team sits within a management company. In this situation, the contracting entity cannot be chosen arbitrarily. Building a stable franchise network starts with making clear to franchisees who provides the business resources, who owes them ongoing support, and who is accountable when problems arise.

1. Choose the entity based on its operations, not its name

China's Regulations on the Administration of Commercial Franchising expressly prohibit organisations other than enterprises, as well as individuals, from acting as franchisors. Article 7 also requires a franchisor to have a mature business model, the capacity to provide ongoing operational guidance, technical support and business training, and at least two company-operated outlets that have been operating for more than one year.

Having ‘brand management’ or ‘chain management’ in a company's name does not mean it meets the requirements for franchising. Nor does completing company registration establish that it has the necessary business model, direct operating experience or support capabilities.

Before choosing the franchisor, compare the practical position of each candidate company:

• Which company can lawfully provide the business resources that franchisees will be authorised to use?
• Which company has experience of running company-operated outlets and can provide supporting evidence?
• Which company can organise training, operational guidance and technical support?
• Which company has the staff and funds needed to fulfil the agreement, handle refunds and meet liabilities for breach of contract?

Do not appoint a company as franchisor simply because it is convenient for invoicing, collecting payments or separating the franchise operation from other business activities. The key questions are whether it meets the requirements and can be held accountable, not whether it makes administration easier.

2. Map resource arrangements: a group is not a single company

Prepare an ‘entity–resource–delivery’ matrix identifying who owns or manages each trademark, item of know-how, company-operated outlet, operating manual, training team and business system. Then record the basis on which the proposed franchisor obtains the right to use each resource or receive the relevant support services.

Each arrangement should answer three questions: is it documented in writing, does its scope cover the franchise business, and will it remain in place long enough to support the commitments made to franchisees? An informal understanding that ‘these are all group resources’ does not establish the rights and obligations of individual companies.

For example, if operational staff are employed by a management company but franchise agreements are signed by a brand company, the arrangements through which the brand company obtains that team's services must be clear. If the internal services agreement can be terminated at any time while the brand company promises long-term training to franchisees, there is an obvious gap in its ability to deliver.

Particular care is needed when demonstrating compliance with the ‘two outlets, one year’ requirement: outlets cannot simply be counted together across the group. The fact that an affiliated company operates an outlet does not automatically mean the proposed franchisor can rely on its records without further checks. Taking account of ownership links, actual operational management and supporting documents, confirm the specific evidence required with the commerce authority responsible for franchise filings. Seek professional advice where necessary. A newly incorporated company cannot claim to meet the requirements merely because its shareholders have operating experience.

3. Allow internal collaboration without leaving external accountability unclear

A group can divide work between its companies, but franchisees should not be expected to pursue training companies, suppliers or system providers themselves to resolve every dispute. The Regulations on the Administration of Commercial Franchising require franchise agreements to be made in writing. Internal collaboration should support performance of that agreement, not replace contractual responsibility.

For each type of support, draw up a responsibilities table identifying the entity accountable to the franchisee, the team carrying out the work, the deliverables, the deadline and the person responsible for handling problems. As far as possible, settle the following arrangements before recruiting franchisees:

• Training support: Who arranges trainers, checks that training has been delivered and handles requests for additional training?
• Operational guidance: Who should franchisees contact with questions, and how are issues escalated if the delivery team cannot resolve them?
• System services: Who activates accounts and deals with faults, and how will support continue if the service provider withdraws?
• Fee administration: Who collects the fees specified in the agreement, and who reviews and handles refunds and disputes?

If an affiliated company collects fees on the franchisor's behalf, clarify its authority to do so, whether payment to it discharges the franchisee's payment obligation, and the invoicing arrangements. This helps avoid gaps between the contracting entity, the payment recipient and the party responsible for refunds. Any services requiring franchisees to sign separate agreements with third parties should also be explained in advance. Franchisees should not discover only after signing that they are expected to accept additional obligations or charges.

Internal agreements should also include contingency arrangements explaining how the franchisor will continue to fulfil its obligations if a team is disbanded or an affiliated company stops co-operating. The risk of maintaining internal working relationships should not fall entirely on franchisees.

4. Keep recruitment, disclosure and delivery aligned with the chosen entity

Once the franchisor has been selected, check that recruitment materials, disclosure documents, agreements, payment instructions and support service notices are consistent. The group's brand can be used to explain the background, but its history must be clearly distinguished from the contracting company's own operating record. Prospective franchisees should not be led to believe that every affiliated company bears responsibility under the agreement.

The Regulations on the Administration of Commercial Franchising require franchisors to provide the prescribed information and the text of the agreement in writing at least 30 days before the agreement is signed, and to ensure that the information is truthful, complete and accurate. Arrangements involving affiliated companies that provide business resources or support delivery should be explained in line with the actual circumstances and statutory disclosure requirements. A vague promise of ‘group backing’ is no substitute for specific facts.

Before signing the first agreement, run through a complete service-delivery exercise: have the proposed franchisor receive a service request, mobilise the relevant affiliated team, confirm completion and deal with any problems. If it can only forward messages and cannot allocate resources or ensure that issues are resolved, strengthen its internal agreements, staff authority and delivery capabilities before proceeding with franchising.

Practical takeaway: First select a franchisor that meets the requirements and can genuinely take responsibility, then organise the group's resources around it. Before signing, review the resource matrix, internal services agreements and franchisee-facing responsibilities table together. Every promise to franchisees should have both someone responsible for delivering it and a clearly identified party accountable for it.