How Businesses in China Can Design a Clear, Workable Franchise Fee Structure

When an established business prepares to offer franchises, its fee structure is often set before its capacity to provide support has been assessed: an initial franchise fee is quoted first, with training, system and marketing fees added later. This approach can lead to overpromising and underdelivery. Building a stable franchise network starts with what the franchisor actually provides, how costs arise and how accounts will be settled when a franchisee leaves. Only then can it develop a fee structure that is clear, auditable and workable.

1. Base the fee structure on the cost of providing services

Do not simply copy another brand’s prices. Even where outlets look similar, the franchisor’s responsibilities for site selection, training, procurement and operational oversight may differ considerably. Start by listing the support an outlet needs from the pre-opening stage through to day-to-day trading, then distinguish one-off services from ongoing support.

Create an internal cost schedule recording four elements for each service: what will be delivered, who is responsible, the resources required and evidence of delivery. Opening training, for example, may involve not only trainers’ time but also venue hire, materials, travel and supplementary training. Ongoing operational oversight may involve site visits, remote support and follow-up checks on corrective action.

Use this analysis to distinguish between the purposes of different charges:

• Initial fees: cover arrangements for using the brand and business resources, together with the one-off opening support specified in the contract.
• Ongoing fees: fund agreed services such as day-to-day operational guidance, technical support and business training.
• Fees for specific services: cover separately identified systems, additional training or other specific services, with a clear statement of whether they are compulsory.
• Security deposits: secure specific contractual obligations and should not be treated as service revenue that can be recognised immediately.

These are categories for designing a fee structure, not a standard set of charges prescribed by law. The key is to avoid charging twice for the same service, or relying indefinitely on initial fees from new franchisees to cover the cost of supporting existing outlets.

2. Make the calculations reproducible

Article 11 of China’s Regulations on the Administration of Commercial Franchising requires written franchise agreements to specify the types, amounts and payment methods of fees, as well as the details of operational guidance, technical support and training services and how they will be provided. A fee schedule therefore needs more than a list of charges accompanied by the phrase “in accordance with head office standards”.

For fixed fees, specify the amount, payment milestones, period covered and whether tax is included. For turnover-based fees, define turnover: how are delivery orders, discounts, platform subsidies, refunds and prepaid customer balances treated, and which records determine the figures? Turnover is not necessarily the same as cash actually received. The basis of calculation should not be left undecided until payment falls due.

System fees should state whether they are charged per outlet, user account or device, how additional outlets are charged and whether fees can be suspended during a temporary closure. Where designated purchasing arrangements apply, list purchase prices, logistics charges and other fees separately. Do not conceal actual payment obligations under a generic “comprehensive service fee”.

Before using the fee structure, ask finance and operations staff to calculate the amount payable independently using the same set of sample orders. If their results differ, the terms are still ambiguous. Then test scenarios such as refunds processed in a later month, outlet closures and early contract termination to check that the settlement process works in practice.

3. Explain charges and set refund rules before collecting payment

China has specific regulations governing commercial franchising. Both the Regulations on the Administration of Commercial Franchising and the Measures for the Administration of Information Disclosure in Commercial Franchising address fee information. The Regulations require franchisors to provide the prescribed information and the contract text in writing at least 30 days before the contract is signed. The relevant disclosures should cover the types and amounts of fees, payment methods, and the conditions and procedures for returning security deposits. These details should not be added only when payment is requested.

Article 16 of the Regulations also requires a franchisor that asks a prospective franchisee to pay fees before signing the contract to explain in writing what those payments are for, together with the conditions and procedures for refunds. Calling a payment an “expression-of-interest deposit” or a “reservation fee” does not remove this requirement.

For every advance payment, explain at least who collects it, what it funds, when expenditure begins, when it is refundable, how to apply for a refund and when repayment will be completed. Deductions from security deposits should relate to clearly defined obligations and be supported by verifiable evidence. The agreement should also set out procedures for notifying deductions, handling objections and returning the remaining balance.

Article 12 requires the contract to give the franchisee a specified period after signing during which they may terminate it unilaterally, but it does not prescribe a single nationwide number of days. Businesses should have a qualified adviser review this arrangement alongside the fee settlement terms. A blanket statement that “all payments are non-refundable” is no substitute for specific rules.

4. Keep charges aligned with contractual performance over time

Even a reasonable quotation can become a source of disputes if implementation is poorly controlled. Appoint someone with overall responsibility for the fee structure, coordinating contract schedules, franchise recruitment quotations and finance teams’ payment categories. Any fee waivers, complimentary training or deferred payment arrangements offered verbally by recruitment staff should be confirmed through the appropriate authorisation process and recorded in writing.

Fees for marketing and publicity require particular attention. Article 17 of the Regulations requires these funds to be used for the purposes agreed in the contract, with timely disclosure to franchisees of how they have been spent. In practice, separate accounting records can track budgets, actual expenditure, supporting documents and the treatment of remaining balances. This is a management recommendation, not a universal statutory requirement to open a dedicated bank account.

Ongoing fees should also be supported by records of ongoing service delivery, such as training attendance records, technical support tickets and operational review reports. Before changing fees, check the contractual basis and amendment procedure. A head office notice should not replace any necessary consultation and agreement. Consistent, verifiable implementation does more to preserve trust across the franchise network than an apparently low-priced recruitment offer.

Practical takeaway: Before issuing a quotation, document five things for every charge: the service provided, the basis of calculation, payment milestones, refund conditions and evidence of delivery. Then have finance, operations and legal advisers review them together.