How to Verify China’s ‘Two Stores, One Year’ Requirement Before Franchising

Before turning an existing business into a franchise network in China, head office needs to answer a basic question: do the two outlets being used to demonstrate operating experience genuinely meet the ‘two stores, one year’ requirement? This is neither a test of individual outlet profitability nor simply a matter of producing two business licences. It requires verification of the operating entities, the direct-operation relationship and the facts of continuous trading.

1. Establish the legal threshold before setting contract dates

Article 7 of China’s Regulations on the Administration of Commercial Franchising requires a franchisor to have at least two directly operated outlets that have been trading for more than one year. The franchisor must also have a mature business model and the capacity to provide ongoing operational guidance, technical support, business training and related services.

The ‘two stores, one year’ requirement is therefore a necessary condition, not a substitute for assessing the business model and support capabilities. Adding together the trading periods of two outlets to reach more than a year does not, in itself, demonstrate compliance. When preparing evidence, check separately whether each outlet intended to establish eligibility has been trading for more than one year.

The Measures for the Administration of Commercial Franchise Record-filing require documentary evidence that these conditions have been met. Although the filing takes place after the first franchise agreement is signed, this does not mean a business can sign first and then wait for its directly operated outlets to reach the required trading period.

The Regulations also expressly prohibit individuals and entities other than enterprises from acting as franchisors. If a founder has personally operated an outlet for many years, the relationship between that outlet and the company intending to sign franchise agreements still needs to be checked. The founder’s experience does not automatically establish the company’s eligibility.

2. Check each outlet: who actually operates it and bears the costs and risks?

Start by preparing an outlet checklist. For each location, record the entity named on the business licence, its date of establishment, the actual opening date, ownership or organisational links, the trading address and the name of the enterprise proposing to act as franchisor.

Then use operational records to answer three questions:

• Who controls day-to-day operations? Check arrangements for staff appointments, purchasing, financial management and outlet-level decisions.
• Who bears the operating costs? Establish who pays the rent, wages, supplier invoices and other expenses.
• Who receives the trading income and bears the risks? Cross-check payment accounts, accounting records and relevant contracts rather than relying on the signage alone.

A franchised, jointly operated or managed outlet under the same brand does not automatically become a directly operated outlet simply because head office provides training. Nor should outlets owned by individual shareholders, affiliated companies or subsidiaries be treated as qualifying solely on the basis that ‘we are all part of the same business’.

Where the structure is complex, have a qualified professional review the ownership chain, control arrangements and operational records. Also confirm the documentary requirements with the commerce authority that will handle the filing. Internal business labels are not legal conclusions.

3. Build corroborating evidence of the trading period

A business licence can establish an entity’s registration details, but it may not, on its own, prove that the outlet began trading on the registration date. A lease may also cover fitting-out and preparation periods. Evidence should therefore establish both the actual opening date and continued trading.

Consider organising the following records by outlet and by month:

• Business licences, any necessary operating permits and premises lease documents;
• Sales transaction records, invoicing records, tax returns and financial records;
• Purchasing documents, payroll records, utility bills and similar evidence;
• Opening records, historical photographs of the outlet and operational system records.

These are practical suggestions for verifying trading activity, not a nationally standardised statutory document list. Confirm the specific submission requirements with the relevant authority.

Pay particular attention to consistency in dates, addresses and entity names. For example, if sales records show that payments were received by an entity other than the one named on the business licence, explain the settlement arrangements. Relocations, name changes, transfers of ownership and extended closures should each be recorded on a separate timeline, rather than treating the periods before and after them as indistinguishable.

Do not fabricate documents or backdate contracts to fill gaps. Any trading period that cannot be reliably substantiated should be marked as awaiting verification, not counted as confirmed operating time.

4. Make verification a condition of approval before signing

Once the checks are complete, prepare a one-page summary for each outlet covering the conclusion on direct operation, the trading period that can be substantiated, key evidence, unresolved issues and the person responsible for review. The records for at least two outlets should each be complete: detailed records for one cannot serve as proof for the other.

If the available material is insufficient, first distinguish between ‘the outlet meets the requirement, but supporting evidence is missing’ and ‘the operating relationship or trading period does not yet meet the requirement’. In the first case, obtain the missing evidence and confirm the submission requirements. In the second, revise the timetable for launching the franchise offer. Do not attempt to sidestep the rules simply by renaming the contract ‘brand co-operation’ or ‘technical services’: whether an arrangement constitutes franchising depends on the substance of the transaction.

Practical takeaway: Before signing franchise agreements, ensure that each of two outlets passes three checks: the operating entity, the direct-operation relationship and the trading period. Proceeding only once the evidence is clear gives the franchise network a credible foundation.