Franchising a Hong Kong Business: Setting Up Approval Procedures for New Product Trials and Launches

Once an existing business begins franchising, launching a new product is no longer simply a purchasing decision for head office. Franchise outlets may need to buy equipment, hold more stock and adjust staffing. Rolling out an untested product across the network can easily turn brand innovation into friction between the parties. To maintain a healthy franchise network, head office should establish an approval process covering proposals, trials and full launches before recruiting franchisees.

1. Identify which changes need approval

A new product does not necessarily mean an entirely new item. Changing ingredients, adding a service, introducing collaborative packaging or even altering production methods can affect quality, costs or legal liability. Head office should maintain a product change checklist and set approval procedures according to the likely impact, rather than relying on the founder’s verbal approval for everything.

Proposals can be divided into three categories: minor adjustments that do not affect safety or equipment; changes requiring training or additional stock; and major projects involving new equipment, licences or third-party intellectual property. Each category should specify who may submit proposals, who approves them, which documents are required and whether testing at selected outlets is permitted.

Franchisees may also suggest ideas to meet local customer needs, but submitting a proposal does not authorise them to sell the product. Head office should provide a standard form recording product specifications, target customers, sources of materials, estimated costs and risks. Trial approval must clearly specify the outlets, duration and quantities involved, so that a limited test is not mistaken for network-wide authorisation.

2. Use pilot trials to check whether franchise outlets can deliver

Trials should assess more than sales. On-site support from head office staff at company-owned outlets may conceal problems such as complex preparation, difficulties maintaining stock or inadequate training. Testing should replicate normal franchise outlet staffing, equipment and busy periods as closely as possible. Any additional support should be recorded, rather than treated as part of an outlet’s everyday capabilities.

Before the trial, establish assessment criteria and data collection methods:

• Operational workload: How long does preparation or service take, and will it slow down existing orders?
• Full costs: Beyond the purchase price, have packaging, wastage, storage and additional staff hours been included?
• Consistent quality: Can different employees deliver to the same specification, and are storage or delivery requirements clear?
• Suitability across outlets: Will the product work equally well in smaller premises, outlets with different equipment configurations or those serving different customer groups?

The outcome should be approval, revision and retesting, or cancellation—not simply an assumption that launch will follow. Before franchise outlets participate, the parties should also confirm in writing who bears the costs of trial stock, equipment and unsold goods. Preferential terms offered during a trial should not automatically be used as the cost basis for a full launch.

3. Complete legal checks before committing to a launch

Hong Kong currently has no legislation specifically regulating franchising, nor a general franchise filing system, statutory franchise disclosure period or mandatory franchising code. The filing and disclosure requirements under mainland China’s Regulations on the Administration of Commercial Franchises should not be applied directly to franchise arrangements operating solely in Hong Kong. However, the absence of a dedicated regime does not mean that head office approval alone is sufficient to launch a product.

The parties’ launch obligations and powers to make changes are governed primarily by their agreement and common law principles of contract. Misrepresentations made during franchise recruitment or in product descriptions may also engage the Misrepresentation Ordinance. Products and promotional materials must comply with the Trade Descriptions Ordinance where applicable, while rights to names, images and designs used in collaborations should be checked under the Trade Marks Ordinance and Copyright Ordinance.

Different products are subject to additional requirements. Food products, for example, require consideration of safety, labelling and licensing requirements under the Public Health and Municipal Services Ordinance and its subsidiary legislation. If the launch arrangements also involve designated purchasing requirements, sales territories or restrictions on selling prices, the Competition Ordinance should be reviewed. A franchise agreement should not be assumed to provide an exemption from competition law liability.

In practice, a compliance checklist can identify who is responsible for obtaining permissions, reviewing labels and confirming the scope of licences. A firm launch date should not be promised to franchisees until the necessary checks are complete.

4. Define launch powers and responsibility for costs in the agreement

The franchise agreement should distinguish between mandatory products, optional products and products offered for a limited trial. It should specify which changes head office may make, what notice it must give and when franchisees may apply to defer participation or opt out. A clause stating that head office may amend the operations manual at any time should not, on its own, be used to require franchisees to bear unlimited new expenditure.

Where new equipment, initial stock or additional training is involved, the agreement should clarify who pays, the approval process and a reasonable preparation period. Major changes outside the authority granted by the existing agreement should first be agreed in writing, rather than using updates to the manual as a substitute for contractual negotiations.

Before the full launch, head office should issue a single, consistent version of the launch notice, with approved specifications, operating instructions, training requirements and an effective date. An outlet’s acknowledgement of receipt does not mean it is ready to implement the launch. Equipment, stock and staffing readiness must still be confirmed.

A post-launch review date should also be set to track operational problems and actual costs. Arrangements for suspending or withdrawing the product should remain available, including clear responsibility for dealing with remaining stock.

Practical takeaway: Before recruiting franchisees, rehearse the full process using one proposed new product. Only incorporate the arrangements into the franchise agreement and day-to-day procedures once the approvers, testing criteria, compliance responsibilities and allocation of costs are all clear.