Before Offering Franchises in Hong Kong: Preparing a Pre-contract Disclosure Pack

Turning an existing Hong Kong business into a franchise network takes more than an attractive franchise brochure. Prospective franchisees need to know what their investment covers, where the operating figures come from and what support the brand actually commits to providing. A pre-contract disclosure pack brings recruitment claims, operational evidence and contractual terms together in a form that can be checked. It is not simply another sales brochure.

1. Distinguish Hong Kong law from mainland Chinese requirements

Hong Kong currently has no legislation specifically governing franchising, nor any generally applicable franchise registration requirement, mandatory pre-contract disclosure regime or statutory disclosure waiting period. A brand that voluntarily provides an information pack is therefore not completing a statutory franchise filing procedure in Hong Kong.

Mainland China’s Regulations on the Administration of Commercial Franchises and Measures for the Administration of Information Disclosure of Commercial Franchises form a separate regime. Requirements such as the ‘two outlets, one year’ rule, regulatory filing and written disclosure at least 30 days before signing should not be treated as legal requirements for domestic franchising in Hong Kong. If you plan to recruit franchisees and open outlets in mainland China, you will need to assess the local requirements separately.

The absence of a franchise-specific disclosure regime does not give brands free rein over recruitment claims. Hong Kong’s common law principles of contract and the Misrepresentation Ordinance (Cap. 284) still apply. If a brand induces another party to sign an agreement using false information, disputes over rescission of the contract or damages may follow. The actual consequences depend on the circumstances.

Other general laws may also apply, including the Trade Marks Ordinance (Cap. 559), which governs trade mark rights; the Competition Ordinance (Cap. 619), which may be relevant to pricing and supply restrictions; and the Personal Data (Privacy) Ordinance (Cap. 486), which governs the handling of applicants’ personal data. A franchise arrangement does not remove the need to comply with general business registration and relevant licensing requirements.

2. What should the pack help applicants understand?

The pack’s main purpose is not to showcase the brand’s success, but to help applicants understand the commitments they will be taking on. Consider organising it into the following four categories, with a date and version number on each document:

• Contracting entity and brand rights: State the contracting company’s name and business background, the trade mark owner, the registration or application status, and the basis on which the contracting company is authorised to use the trade marks. Do not present business registration as proof of trade mark registration.
• Investment and ongoing charges: List the franchise fee, deposit, fit-out and equipment costs, opening stock, training and system fees separately. Then explain ongoing management fees, marketing fees, minimum purchasing requirements and renewal fees. Third-party costs that are not yet known should be labelled as estimates, not fixed quotations.
• Support and operating restrictions: Explain who receives training, what it covers, where it takes place, who bears the cost and what opening support is provided. Also set out the main requirements relating to approved suppliers, the permitted scope of operations, site approval and the operations manual.
• Term and exit arrangements: Summarise renewal conditions, remedies for breach, transfer restrictions, and arrangements for removing branding and dealing with stock after termination. Refer applicants to the corresponding clauses in the draft agreement.

If an applicant has not yet signed a confidentiality agreement, you can initially provide the operations manual’s contents page and a summary of key responsibilities, then release sensitive material in stages. Confidentiality arrangements should protect information such as recipes and processes, not prevent applicants from understanding the costs and restrictions they must accept.

3. Financial figures must include sources and limitations

Profitable company-owned outlets do not mean franchise outlets will necessarily make a profit. When presenting operating performance, explain which outlets the figures relate to, the period covered, whether the outlets are established, and whether the figures are actual results or forecasts.

For example, if the brand uses an outlet personally managed by its founder as a model, it should explain whether a reasonable management salary has been included in the costs. Owner-occupied premises, special rent concessions and sales generated by one-off promotions should also be identified, so applicants do not mistake exceptional circumstances for typical results.

Present historical performance, cost estimates and scenario projections separately. Historical figures should be traceable to accounts or sales records. Cost estimates should state the quotation date and any exclusions. Scenario projections should show the assumptions for rent, staffing, gross margin and sales. Any ongoing fees payable by franchisees should also be included in the projections.

Do not show only the best-performing outlet, or replace risk explanations with claims of ‘guaranteed profits’ or a ‘guaranteed return of your investment’. If there is no franchise outlet track record yet, say so plainly. A general disclaimer cannot turn inaccurate figures into reliable information, nor should it be regarded as blanket protection against liability for misrepresentation.

4. Keep records of delivery, questions and updates

The pack should be checked jointly by the operations team, finance team and legal advisers to ensure that the recruitment brochure, fee schedule, manual summary and draft agreement do not contradict one another. Pay particular attention to verbal promises: if recruitment staff offer an ‘exclusive territory’, the documents must clearly define its boundaries, exceptions and online sales arrangements.

When delivering the pack, record the recipient, date, document list and version numbers. Allow applicants reasonable time to seek independent legal and accounting advice. This is prudent practice, not a statutory waiting period in Hong Kong. An acknowledgement of receipt establishes only that the documents were delivered; it does not mean the recipient agrees with all their contents or waives any rights.

Maintain a single written record of questions and answers to avoid different recruitment staff giving inconsistent explanations. If rent estimates, supply prices or support arrangements change materially before signing, proactively update the information, clearly identify the changes and give applicants an opportunity to reassess. Access to applicants’ identity and financial information should be restricted, with retention and deletion arrangements based on the purposes for which it was collected.

Practical takeaway: before formally recruiting franchisees, carry out a ‘promises versus evidence’ check. Every charge should have a clear basis of calculation, every figure a source, and every support commitment an accountable person and a contractual basis. That is the starting point for building a trustworthy franchise network.