Franchising in China: How to Define Territorial Protection and Allocate Online Orders

When turning an existing business into a franchise network, a franchisor can easily promise that ‘this area is yours alone’ without explaining whether that includes delivery orders, livestream sales, corporate bulk purchases or company-owned outlets. Workable territorial protection should tell franchisees what rights they receive and give the franchisor clarity about its scope for future growth. Before signing, map out geographical boundaries, channel rights and order-handling rules together.

1. Define exactly what is being protected

Territorial protection can involve at least three distinct arrangements: the franchisor agrees not to open new company-owned outlets within an agreed area, agrees not to authorise other franchise outlets there, or grants the franchisee the right to develop further outlets in that area. These are not the same thing and should not be bundled into a vague promise of ‘exclusive agency’.

Businesses franchising for the first time should establish whether the authorisation covers one specified outlet or the right to develop an entire area. A single-unit franchise does not automatically include the right to open branches, grant sub-franchises or recruit other franchisees. Where area development rights are granted, separate terms should cover outlet approvals, development schedules and what happens if targets are not met.

Prepare a checklist of rights that answers each of these questions:

• Can the franchisor open company-owned outlets, pop-ups or concessions within the protected territory?
• Does protection extend to special locations such as shopping centres, airports and railway stations?
• How will existing outlets and outlets already under contract but not yet open be treated?
• If a franchisee relocates, does the original protected territory remain in force?

Define the scope of every exception. Avoid open-ended wording such as ‘the franchisor may make adjustments as required’. Territorial protection is a contractual arrangement within the franchise network. It does not prevent other brands from competing legitimately, nor does it guarantee footfall or profits.

2. Replace vague promises with maps and clear conditions

‘Within three kilometres’ may sound straightforward, but disputes can arise over the starting point and whether distance is measured in a straight line or along roads. A named ‘shopping district’ may also change as development progresses. A contract schedule should use verifiable addresses, road boundaries or coordinates, accompanied by a map agreed by both parties. It should also explain how discrepancies between the written description and the map will be resolved.

Before dividing up territories, the franchisor should plot existing company-owned outlets, franchise locations already promised and sites awaiting approval on the same base map. Different franchise recruitment staff should not make separate territorial promises and leave franchisees to bear the consequences of overlapping grants. Maps should carry a version number and approval date, and all territorial adjustments should be recorded in writing.

Any conditions attached to protection must also be clear from the outset. If protection depends on opening on time, remaining in operation or meeting agreed service standards, specify the assessment criteria, data sources, verification methods and opportunities to remedy shortcomings. A clause simply stating that protection may be withdrawn for ‘poor performance’ is not enough.

For example, a temporary closure caused by shopping centre refurbishment should be treated differently from an unjustified closure by the franchisee. Operating problems caused by interruptions to the franchisor’s supplies should not simply be counted as franchisee breaches either. The purpose of these conditions is not to let the franchisor withdraw rights at will, but to enable both parties to identify when an adjustment is justified.

3. Separate online customer acquisition, fulfilment and settlement

Online orders should not be allocated solely by the customer’s address. An order might originate from advertising paid for by the franchisor, be assigned to an outlet by a platform and then be fulfilled by another outlet. The rules should separately address how customer enquiries are allocated, who provides the service, and how revenue and costs are settled.

Set rules for each business scenario:

• Outlet-run delivery services: Explain whether deliveries may extend beyond the protected territory and how overlaps with neighbouring outlets’ delivery areas will be handled.
• Orders through the franchisor’s online shop: Specify whether allocation is based on stock, distance or service capacity, and how orders are reassigned if an outlet is out of stock or rejects them.
• Vouchers sold through livestreams and vouchers redeemable nationwide: Agree which outlets will participate, how settlement works after redemption, and who bears the cost of refunds and promotional subsidies.
• Corporate bulk purchases: Clarify whether contracts are signed centrally by the franchisor or handled by local outlets, and how outlets will cooperate on cross-territory fulfilment.

The franchisor should also distinguish between channels it controls and rules set by third-party platforms. If it cannot control a platform’s recommendations or visibility, it should not promise that customers in a particular area will see only one outlet. Allocating orders does not give unrestricted permission to share customers’ personal information: data processing must still comply with the Personal Information Protection Law of the People’s Republic of China and other applicable rules.

Before launch, run several test orders through the entire process: placement, reassignment, redemption, refund and settlement. If the finance system cannot calculate payments as agreed, or customer service staff cannot explain who is responsible, the rules are not yet ready.

4. Embed territorial rules in the contract and signing process

Commercial franchising in mainland China is specifically governed by the Regulations on the Administration of Commercial Franchises. These require a written franchise agreement and specify its main contents, including the scope and duration of the franchise, the parties’ rights and obligations, consumer protection, liability for breach and dispute resolution. There is no nationally prescribed statutory radius for territorial protection; the specific rights need to be established through clear contractual terms.

Under these Regulations and the Measures for the Administration of Information Disclosure of Commercial Franchises, the franchisor must provide the prescribed disclosure information and the contract text in writing at least 30 days before the agreement is concluded. Territorial arrangements affecting the distribution of franchise outlets, operating restrictions and conditions for support should be consistent with the relevant disclosures. Do not promise exclusivity orally during recruitment, only to present a territorial schedule containing numerous exceptions on signing day.

When using pre-drafted standard terms, franchisors must also consider the requirements of the Civil Code of the People’s Republic of China. For terms that materially affect the other party’s interests—such as withdrawal of protection, unilateral territorial changes or restrictions on franchisee rights—the franchisor must meet its legal duties to draw attention to and explain those terms. A franchisee’s signature does not, by itself, resolve risks concerning a term’s validity. If the arrangements also raise competition issues, such as resale price restrictions, a separate anti-monopoly compliance review is needed.

Finally, establish a clear procedure for objections: who receives complaints about overlapping territorial grants, what evidence is required, when checks must be completed, and what remedies or liability follow a confirmed breach. Franchise recruitment managers, operations staff and finance teams should all use the same version of the territorial rules.

Practical takeaway: before recruiting your first franchisees, prepare a boundary map, a channel-rights checklist and a set of order-testing records. Only when all three align with the contract, point by point, does territorial protection become a commitment the whole franchise network can put into practice.