Minimum Sales Targets in Hong Kong Franchise Agreements: Thresholds and Consequences to Clarify Before Signing

When considering a franchise in Hong Kong, prospective franchisees often calculate franchise fees and rent first, overlooking the agreement’s minimum sales targets. These clauses may directly affect whether the franchise can continue, so they should not be treated merely as the franchisor’s aspirations. Before signing, assess the targets, calculation methods, support commitments and consequences of falling short together.

1. Distinguish forecasts, targets and contractual thresholds

Hong Kong’s Intellectual Property Department explains that franchising is a particular type of licensing relationship. An intellectual property licence may carry diligence obligations, such as achieving minimum sales volumes, and failure to fulfil those obligations may lead to termination of the licence. The “projected turnover” in franchise marketing materials should therefore not be confused with binding performance requirements in the agreement.

When reviewing the documents, ask the franchisor to divide the relevant figures into three categories:

• Indicative forecasts: figures used to assess the business, rather than results you commit to achieving.
• Management targets: benchmarks for reviewing performance, where falling short does not necessarily constitute a breach of contract.
• Contractual thresholds: requirements whose non-fulfilment triggers specified consequences, such as a deadline for improvement or termination of the licence.

Look particularly closely at phrases such as “minimum performance”, “reasonable endeavours” and “satisfactory sales”. Even requirements without a fixed numerical target can create uncertainty if the franchisor alone decides whether they have been met. Ask for objective criteria and a clear order of precedence between schedules, annual plans and the main agreement.

Hong Kong currently has no legislation specifically regulating franchising, nor a generally applicable system of mandatory franchise disclosure, registration or a statutory code of conduct. The relationship is governed primarily by common law contract principles and applicable legislation, such as the Misrepresentation Ordinance. Trademark licensing also requires consideration of the Trade Marks Ordinance. Do not assume that the law automatically provides a grace period for missed targets: any such protection should be negotiated into the agreement.

2. Turn the sales threshold into a calculation you can check

“Achieve a specified monthly turnover” is still not clear enough. First, establish whether performance is measured by sales value, units sold or the quantity purchased from the franchisor. Meeting a purchasing target does not mean the goods have been sold. If the two measures are confused, franchisees may accumulate stock simply to retain their franchise rights.

Next, specify how refunds, discounts, cancelled orders, delivery platform fees and gift voucher redemptions are treated. If a shop fulfils an online order but the franchisor receives the payment, does it count towards that shop’s sales? The same transaction should not be measured differently across reports.

The assessment period also matters. Monthly assessments and cumulative annual assessments can produce different outcomes for shops with pronounced seasonal fluctuations. Consider negotiating for assessment to begin with the first full month of trading, a separate start-up ramp-up period, and clear adjustments for periods of closure. These arrangements are matters for negotiation, not statutory rights.

Before signing, ask the franchisor for a sample calculation sheet and test scenarios involving refunds, transactions spanning different months and platform orders. If the two parties arrive at different results, amend the wording before opening rather than leaving its interpretation until later.

3. Link performance obligations to franchisor support

A reasonable target should not simply state what the franchisee must achieve while ignoring the conditions needed to achieve it. Ask the franchisor to explain the basis for the target, including shop size, opening hours, the characteristics of the local trading area and how established the brand is in Hong Kong. An overseas flagship store’s performance should not automatically become the threshold for a new Hong Kong outlet.

Then include key dependencies in the agreement, such as the supply of core products, functioning order systems and any launch promotions promised by the franchisor. If franchisor stock shortages or system failures prevent the shop from taking orders normally, agree in advance whether targets for the affected period will be suspended, adjusted proportionately or revised separately in writing.

Exemption clauses must also work in practice. Specify when the franchisee must give notice, what records must be submitted and who will review the request. Keeping stock shortage notices, system fault logs and closure records helps distinguish underperformance from obstacles outside the franchisee’s control.

If targets are updated annually, specify the adjustment procedure and effective date to prevent the franchisor from retrospectively raising thresholds for an assessment period that has already ended. The agreement should also address what happens if the parties cannot agree on a new target.

4. Agree an improvement process before sanctions apply

Check carefully what a missed target triggers. Is it merely a requirement to submit an improvement plan, or could it mean additional payments, loss of certain rights or even termination of the licence? Several consequences may apply at once, so do not limit your review to the clause headed “Performance”.

Consider negotiating a staged process: the franchisor first supplies a detailed calculation, giving the franchisee an opportunity to check it and raise objections; once the shortfall is confirmed, the parties agree an improvement plan and a reasonable period to remedy it; performance is then reassessed against previously agreed criteria at the end of that period. Make clear whether a single missed target and consecutive failures have different consequences, and how the effect of previous failures is cleared once targets are met again.

If the agreement allows a payment to make up a shortfall, confirm whether that payment satisfies the requirement for the relevant period or whether the franchisor can still terminate the licence after accepting it. Never assume that paying the difference guarantees your right to continue operating.

Practical takeaway: Before signing, prepare a table covering “thresholds, calculations, support, exemptions, remedies and consequences”, and have it checked by a solicitor familiar with Hong Kong commercial contracts. Only performance requirements that can be calculated, verified and remedied are suitable for a long-term franchise commitment.