Franchising in China: How to Set Contractual Cooling-off Periods and Exit Procedures

When expanding an existing business into a franchise network, companies often focus on signing agreements and opening outlets, overlooking how franchisees can withdraw after signing. Cooling-off arrangements affect not only franchisees’ right to reconsider, but also the franchisor’s payment collection, training and provision of resources. This article focuses on cooling-off periods in mainland Chinese franchise agreements, helping businesses establish workable exit procedures before recruiting their first franchisees.

1. Distinguish the cooling-off period from pre-contract disclosure

Article 12 of the Regulations on the Administration of Commercial Franchising requires the franchisor and franchisee to agree in their contract that the franchisee may terminate it unilaterally within a specified period after it is concluded. This is commonly called the franchise agreement’s ‘cooling-off period’. It is not a discretionary concession from head office and should not be worded as a right to withdraw ‘only with head office approval’.

The Regulations do not prescribe a standard number of days for the cooling-off period. Businesses should set a reasonable period that reflects how business resources are provided, the preparations involved and the franchisee’s assessment needs, and have it reviewed by a legal adviser familiar with franchising. Do not simply copy the returns period used for ordinary purchases of goods into a franchise agreement.

The cooling-off period is also distinct from the pre-contract disclosure period. The Regulations on the Administration of Commercial Franchising and the Measures for the Administration of Information Disclosure in Commercial Franchising require, as a general rule, that the prescribed information be disclosed to the franchisee in writing, together with a copy of the proposed agreement, at least 30 days before the agreement is concluded. The cooling-off period comes after signing; disclosure comes before it. Completing disclosure does not remove the need for a cooling-off clause.

Omitting this clause does not necessarily mean that the franchisee loses the ability to terminate unilaterally. If a dispute arises, whether that right can be exercised, and with what consequences, will depend on the facts and applicable legal rules.

2. Turn the right to terminate into clear practical steps

The agreement should do more than state that ‘the franchisee is entitled to a reasonable cooling-off period’. When drafting it, address at least four questions:

• How is the period calculated? Specify the event that starts the period, its duration and the rules for determining when it expires. Avoid confusion between the date shown on the agreement, the actual signing date and the payment date.
• Who receives the notice? List the address, designated email address and contact person at head office for termination notices, and explain how changes to these details will be communicated.
• How is notice delivered? Set out the permitted written channels, how delivery will be established and what evidence should be retained. Avoid relying solely on a franchise recruitment representative’s personal messaging account.
• How will head office respond? Set internal deadlines for logging the notice, reconciling payments, disabling access to resources and processing refunds. Internal approval must not, however, be a prerequisite for the franchisee to exercise the right to terminate.

Businesses can provide a termination notice template so franchisees can easily enter the agreement number, their statement of termination and contact details. Using that template should not be the only valid way to give notice.

Cooling-off clauses are usually standard terms drafted in advance by head office. Businesses should therefore also consider the rules in the Civil Code of the People’s Republic of China on drawing attention to and explaining standard terms, and on their validity. Provisions with a significant bearing on franchisees’ interests, such as refund restrictions and fee deductions, should be highlighted prominently and explained as required, rather than buried at the end of an appendix.

3. Align payments and resource provision with the exit arrangements

Disputes are particularly likely when the agreement permits withdrawal but the business process involves substantial purchases, training and the transfer of core technology on the day of signing. Businesses should create a ‘cooling-off period delivery checklist’, separately recording payments received, resources provided, services delivered and commitments to third-party purchases.

Where this would not disrupt reasonable preparations, substantial non-cancellable expenditure and the provision of core business resources can be scheduled for after the cooling-off period expires. If work genuinely needs to begin earlier, explain in advance what it involves, who bears the costs and the cancellation conditions. Do not use pressure to open on schedule as a reason to ask franchisees to waive their rights.

Refund clauses should distinguish between franchise fees, security deposits, advance payments for goods and other payments, explaining how each will be reconciled and handled. Do not use a blanket ‘all payments are non-refundable’ clause, or relabel the entire franchise fee as a service fee to avoid settling accounts following withdrawal.

For services already provided, whether a deduction is permitted, and how much may be deducted, should be assessed against the agreement, the services actually delivered, supporting evidence and applicable law. Head office’s unilateral pricing should not be the sole basis. Nor should a franchisee’s acknowledgement of receipt of training materials, or activation of a system account, automatically be treated as a waiver of the right to terminate.

4. Test the agreement with a simulated exit

Before formally recruiting franchisees, ask the recruitment, operations, finance and legal teams to run through a scenario together: if a franchisee gives notice of termination within the agreed period, can head office establish when it was delivered, stop further charges, cancel any cancellable orders and complete the financial settlement as agreed?

Focus on three points of co-ordination: whether recruitment statements match the agreement; whether finance can account for each payment according to its nature rather than refusing all refunds; and whether operations knows which accounts, materials and brand displays must be deactivated, returned, handed over or taken out of use.

The exit checklist should also cover confidential materials, unused supplies and unfulfilled customer orders. Confidentiality obligations may continue in accordance with the law and the agreement, but checks on confidentiality matters should not be used as an excuse to delay undisputed refunds indefinitely.

Finally, retain notices, delivery records, settlement breakdowns and handover evidence. Expiry of the cooling-off period concerns only this particular agreed termination mechanism. It does not automatically prevent a franchisee from asserting rights under other legal provisions or contractual terms.

Practical takeaway: Before signing, review the cooling-off clause, phased delivery checklist and exit-processing form together. A credible, workable exit arrangement for a franchise network must clearly answer four questions: ‘When can the franchisee withdraw, how must they give notice, how will accounts be settled, and who will carry out the process?’