Franchising in China: How to Set Up Post-Signing Termination and Refund Procedures

When businesses develop an existing operation into a franchise model in China, they often focus first on franchise recruitment and opening arrangements, overlooking what happens if a franchisee decides to withdraw after signing. A clear exit mechanism does not mean lowering the threshold for commitment. It gives both parties a structured way to handle a change of mind before their investment grows. Before the first agreement is signed, the franchisor should turn the relevant clauses into procedures that customer service, finance and operations teams can all follow.

1. Distinguish the post-signing termination period from pre-contract disclosure

Article 12 of China’s Regulations on the Administration of Commercial Franchising requires the franchisor and franchisee to agree in their contract that the franchisee may unilaterally terminate it within a specified period after it is entered into. This is commonly called a ‘cooling-off period’, but the Regulations do not prescribe a uniform number of days. Businesses must not present a period they have chosen themselves as a nationwide statutory standard.

This is separate from pre-contract disclosure. The Regulations require the franchisor to provide the relevant information and the contract text in writing at least 30 days before the agreement is entered into. That requirement helps prospective franchisees make an informed decision; it does not replace the contractual provision for unilateral termination after signing.

When drafting the agreement, specify when the period begins and ends, and how notice must be delivered. Do not simply state that the franchisee ‘has a cooling-off period in accordance with the law’ without setting out a workable timetable. Qualified legal advisers should assess whether the period is reasonable and whether any conditions materially restrict the right to terminate, taking account of the particular business.

2. Make termination notices straightforward to act on

Unilateral termination should not be framed as ‘an application by the franchisee that takes effect only once approved by head office’. The franchisor may verify the identity of the person giving notice, acknowledge receipt and arrange settlement, but internal approval should not become a precondition for exercising the agreed termination right.

The agreement should designate a postal address, email address or another mutually accepted channel for notices, and clearly explain what constitutes valid delivery. Internally, the franchisor should also appoint a backup recipient so that notices are not left unprocessed because a franchise recruitment manager has left, is on leave or fails to forward a message.

On receipt of a notice, create a case record covering at least:

• The contract reference, signing date and franchisee’s identity;
• The content of the notice, delivery channel and time of receipt;
• Fees received, goods delivered and services provided;
• The contact person for follow-up, settlement milestones and outstanding matters requiring confirmation.

If there is a dispute over whether notice was given within the agreed period, retain the full records and arrange a prompt legal review, rather than simply deleting the franchisee’s system account or returning the notice. Customer service staff should not insist that ‘notice only counts once the form has been submitted’ unless that requirement has been lawfully and reasonably agreed.

3. Break refunds down into verifiable settlement items

The Regulations’ provision for unilateral termination within a specified period does not establish a uniform refund percentage for every payment. Businesses should identify in advance who receives each payment, when it is paid and how it will be handled, covering franchise fees, security deposits, training fees, equipment payments and other charges. This avoids presenting an unexplained lump-sum deduction when a franchisee withdraws.

For each proposed deduction, explain the contractual basis, what has actually been delivered or performed, the supporting evidence and the calculation method. Its legality and reasonableness should also be reviewed. Merely saying that ‘a file has been opened’ or ‘a place has been reserved’ does not automatically justify retaining all payments. Nor should a blanket ‘no refunds under any circumstances’ clause be used to render the termination arrangements ineffective.

Where third-party fit-out, equipment purchases or rental costs are involved, establish who signed the relevant contract, who paid and whether that contract can be cancelled. The franchisor should not promise to refund directly money it has not received. Equally, where it has collected payments on another party’s behalf, it cannot avoid any responsibility it bears simply by saying that the money has already been passed on.

The settlement statement should show the amounts received, the proposed refund, disputed items, the payment date and the receiving bank account. A dispute over one charge should not hold up the entire process indefinitely: the parties can first agree how to settle the undisputed amounts.

4. Limit irreversible commitments during the termination period

Contract terms must align with the opening schedule. The franchisor should check whether the agreed termination period automatically triggers non-cancellable orders for bespoke equipment, substantial fit-out work or intensive paid training. Where spending can reasonably be deferred, schedule it after both parties have confirmed that they wish to proceed. If work genuinely needs to begin earlier, explain the costs and cancellation conditions and retain a record of confirmation. Early performance must not be structured as a way to circumvent the termination right.

Exit arrangements should cover manuals, samples, equipment, system access and any authorised use of brand signage or displays. Requirements to return materials, stop using the franchisor’s business resources and maintain confidentiality should be specified in the agreement in advance. These should be coordinated with the refund process so that neither side is left waiting for the other to act.

Before recruiting the first franchisees, the recruitment, legal, finance and operations teams can run a joint simulation: if a franchisee sends a termination notice on the final day of the agreed period, can the franchisor receive it promptly, stop further spending, calculate the settlement and complete the handover? Any gaps in responsibility exposed by the exercise should be resolved before contracts are signed.

Practical takeaway: prepare a clear termination clause, a fee settlement statement and an exit handover checklist. Make sure franchisees know how to give notice of termination, and that the franchisor knows who is responsible for each step once it arrives.