Franchise Payment Settlement in Hong Kong: Clarify Where Sales Proceeds Go, Deduction Rights and Refund Liability Before Signing

When choosing a franchise brand, look beyond franchise fees and ask: once a customer pays, whose account receives the money first? If head office or a designated platform collects payments centrally, the outlet’s ability to pay rent and wages on time will depend on the settlement arrangements. A healthy franchise network needs clear financial records; brand recognition is no substitute for contractual safeguards over sales proceeds.

1. Map the flow of sales proceeds

Do not settle for answers such as “head office transfers the money every month”. Ask the brand to identify, for each channel—including in-store card payments, online orders, food delivery platforms and e-wallets—the company collecting payment, the payment service provider, the holder of the receiving account and the company that ultimately pays the franchise outlet. Different channels may use different arrangements, so a single broad explanation is not enough.

In particular, distinguish three roles: the party selling goods or services to the customer, the party collecting payment on its behalf and the party handling refunds. Check whether the company names on receipts, order terms and the franchise agreement match. If they do not, request a written explanation of their relationships and respective responsibilities.

Before signing, ask to see anonymised settlement statements and a demonstration of the back-office system. Check whether you can trace individual orders, discounts, refunds, payment processing fees and the amounts actually credited to your account. A dashboard showing turnover is not the same as a complete reconciliation tool.

Also ask: will money collected on your behalf be mixed with head office’s day-to-day operating funds? Will it be held in a separate account? A separate account does not, by itself, mean the money is protected by a trust, nor does it guarantee priority recovery if head office goes into liquidation. If the brand claims that sales proceeds are ring-fenced, ask a solicitor to verify the documents and practical arrangements rather than relying on the account’s name.

2. Put settlement cycles and deduction rights into verifiable terms

The agreement should specify the transaction period covered by each settlement, the cut-off time, the payment due date and what happens in the event of public holidays, failed payments or missing information. Phrases such as “regular settlement” or “payment in accordance with platform policies” are not enough to plan your cash flow.

Ask for an attached schedule of deductions covering, at a minimum:

• Standard charges: How transaction fees, system fees and other items deductible from sales proceeds are calculated, and what supporting documentation will be provided.
• Refunds and chargebacks: Which types of transaction allow money to be clawed back, what records must be provided and whether an additional handling fee applies.
• Reserves: When funds may be withheld, the basis of calculation, any cap, and the conditions for review and release.
• Disputed amounts: Whether undisputed sums must still be paid on time after the franchisee raises an objection.

Pay particular attention to clauses allowing the deduction of “any sums owed by the franchisee”. These may extend beyond the order concerned and could be used to deduct disputed charges under other agreements. Discuss with a solicitor whether to limit the scope of set-off, require advance notice and specify procedures for disputes and corrections.

Prepare a sample settlement calculation yourself: start with the total amount paid by customers, deduct discounts, refunds, fees and reserves line by line, then calculate the net amount receivable and the date it will reach your account. This is not a profit forecast; it is a test of when sales proceeds actually become available to spend. Budget for rent and wages around the dates funds arrive, not simply the dates sales are made.

3. Treat refunds, chargebacks and account suspensions separately

A customer refund, a payment chargeback and an account suspension imposed by the brand because of a contractual dispute are three different events. They should not all be bundled into a single clause stating that “head office has the right to deduct funds”.

For example, if an online order is refunded after the outlet has already delivered the goods, who investigates? If head office approves a goodwill refund on its own initiative, can it pass the full cost to the outlet? When a payment service provider raises a chargeback, who submits proof of delivery or fulfilment? Before signing, agree how notifications will be given, the deadlines for submitting evidence and how costs will be allocated.

Ask for a requirement that head office provide enough information to identify the transaction and explain the deduction, helping to prevent the same refund being deducted again in a later settlement period. The outlet should also retain order, delivery and refund records, and reconcile statements and raise objections within the time limits set by the agreement.

If an account is suspended, distinguish between stopping new orders and withholding proceeds from existing sales. You could negotiate for only an amount proportionate to an identifiable risk to be retained, with periodic reviews, rather than allowing the entire balance to be withheld indefinitely. The agreement should also separately specify the final settlement date on termination, reserves for outstanding refunds, the final statement and the procedure for releasing the remaining balance.

4. Hong Kong has no dedicated franchise disclosure regime, so request documents proactively

Hong Kong currently has no legislation specifically regulating franchising, nor a generally applicable statutory pre-sale franchise disclosure regime, franchise registration system or mandatory franchise code of conduct. Do not assume, therefore, that head office is legally required to provide a standard set of settlement disclosure documents. Nor should business registration be treated as government approval of arrangements for collecting payments on your behalf.

The parties’ responsibilities for collecting payments, making deductions and paying out funds are governed primarily by their contract and common law principles. If false representations about the protection of funds or settlement arrangements are made before signing, the Misrepresentation Ordinance (Cap. 284) may apply. Accessing or exchanging transaction records containing customers’ personal data also requires consideration of the Personal Data (Privacy) Ordinance (Cap. 486).

Customer refunds cannot be assessed solely by reference to head office policy either. Hong Kong has no general statute called the “Hong Kong Consumer Law”. Transactions involving goods or services may fall under legislation such as the Sale of Goods Ordinance (Cap. 26) or the Supply of Services (Implied Terms) Ordinance (Cap. 457), respectively. The applicable rights and responsibilities depend on the nature of the transaction; legal liability to customers cannot be excluded simply through the franchise agreement.

Before paying to join a franchise, have a Hong Kong solicitor and accountant review the funds-flow arrangements, sample settlement statements, schedule of deductions and relevant platform terms together. If the documents permit unilateral changes to settlement rules, clarify the arrangements for notice, transition and objections as well.

Practical takeaway: Establish “who collects the money, when it reaches your account, what justifies deductions and how you recover the balance” before deciding whether to sign. However impressive the turnover, it is no substitute for cash receipts you can verify and plan around.