On May 1, 2007, China’s Ministry of Commerce (MOFCOM) will be enacting new franchise regulations that will apply equally to foreign and domestic franchisors and that are expected to make foreign company franchising easier.

China’s franchise requirements are fairly basic. Franchisors must have been in business for at least one year and have owned at least two direct-operation stores. The current regulations require these two stores to have been in China so the silence on this in the new regulations probably means two stores anywhere will qualify. The new regulations are also vague as to whether the two direct operations stores have to have been operating for at least a year or merely the franchisor itself have been in business for that time.

The franchisor is required to provide accurate written information and other materials regarding the franchised operations at least 30 days before signing a Franchise contract. This information must include, among other things, the franchisor’s name, domicile, amount of registered capital, business scope, intellectual property rights, and involvement in lawsuits.

The franchise contract must be in writing and must be for a minimum of three years, unless the franchisee expressly agrees otherwise.  The regulations have an unspecified cooling off period, during which time franchisees can terminate their franchise contracts.

The new regulations do not require franchisors to secure approval to franchise before doing so; they merely require franchisors register with the provincial government or MOFCOM (for those who will engage in franchising in multiple provinces) within 15 days after selling the first franchise. The government is then required to register the franchisor within 10 days of receiving the required documents from the franchisor. The franchisor’s required documents include copies of a certificate of incorporation or business license, a form franchise agreement, an operations manual, a market plan, and evidence the franchisor owned at least two directly operated stores (For at least a year? Anywhere?) and been in business for at least a year. Franchisors are not required to provide financial disclosure documents to the government, but they are required to provide them to prospective franchisees.

Under the new regulations, franchisors are no longer jointly and severally liable for products and services provided by their designated suppliers. For instance, if McDonald’s designated cup supplier provides the franchisees with defective cups, McDonalds itself will not be liable for that.

Though much will depend on how the new regulations are enforced, China does appear to be opening up on franchising and it is looking like doing business in China will soon be getting easier on the franchise front.

  • Ed Hillier

    I’m curious to know which article is the “unspecified cooling off period” is in.

  • Ed —
    Article 12. I am actually answering this based on your firm’s [DLA Piper] excellent English language translation, rather than checking back in with Steve to have him go over the Chinese version. DLA’s translation comports with my understanding, which is that the law requires the franchise contract have a provision giving the franchisee the right to terminate. The law is silent as to how long a period the franchisee should have and so that is something that will need to be discussed with authorities. The translation can be found here: http://www.dlapiper.com/files/upload/China_Franchise_Regulations_English_text_feb07.pdf
    Though it would be tempting for the franchisor to put in some ridiculously small amount of time, like 12 hours, I strongly suspect that would be deemed unacceptable and would only create huge problems. The expected “cooling off” period will likely eventually be determined by common practice, but in the meantime, it will probably need to be based on the practices in other countries or in related areas.

  • Duncan

    The China Business Review (published by the US China Business Council) recently had a good article on the new franchising situation. It suggested that further clarification of some of the elements of the new law may be issued soon.

  • Duncan —
    Thanks for checking in on this. I did not see that article, but I have heard clarification will be forthcoming, but I tend to take an “I will believe it when I see it” view on such things.

  • Ed Hillier

    Thanks!