International franchisors should follow certain formalities of executing a contract in the People’s Republic of China (PRC) to ensure that it can be enforced against the franchisee. The franchisee’s official name in Chinese must be used. Neither companies nor individuals in China have official English names.
What are the legal requirements for franchising in China?
Third, franchises in China are subject to national network-based record filing. This requires the franchisor to file their records with the relevant commercial authorities within 15 days after initially signing a franchise contract with the franchisee. For foreign franchisors, there are two common ways to enter the Chinese market:
What is a franchise agreement?
What is a Franchise Agreement? The term “franchise agreement” refers to the legally binding document establishing the terms and conditions between a franchisor and a franchisee. The franchise agreement governs everything right, from the floor design of the franchisee’s establishment to how the franchisee should run the business.
How many franchisors are there in China?
As of January 2019, 4,368 franchisors have registered with the Ministry of Commerce (MOFCOM), while unofficial statistics indicate that China already has over 4,500 franchises and chains with some 400,000 outlets in operation, making China one of the largest franchise markets in the world.
Why do international franchisors choose to incorporate in China?
Most international franchisors prefer to grant franchises in China without establishing a local entity. Franchisors who decide to incorporate in China used to establish a wholly foreign-owned enterprise ( WFOE ), but this type of entity is now abolished.
Does China allow franchising?
China adopted its first franchise law in 1997, but foreign franchising remained mostly a gray area at that time until a new law was announced in 2005, which eliminated legal restrictions on foreign investment in franchising. Now, China's franchise law is clearer by virtue of the 2007 law, a revision of the 2005 law.
Can franchises be international?
The most common franchise form for international expansion is master franchising. Master franchising offers people or corporations the opportunity to purchase the rights to offer franchises for the franchisor within a certain territory.
What are the four types of franchise agreements?
Below are four types of agreements franchised businesses commonly form.Single-Unit Franchise Agreement. In a single-unit agreement, the arrangement grants the franchisee the right to open and operate a single franchise unit. ... Multi-Unit Franchise Agreement. ... Area Development Franchise Agreement. ... Master Franchise Agreement.
What are the three types of franchise agreements?
When it comes to structuring franchise arrangements, there are typically three different types of franchisor and franchisee agreements.Single-Unit Franchise Agreement. ... Area Development Agreement. ... Master Franchise Agreement.
What are the legal issues in international franchising?
In addition to pre-sale disclosure regulation, international franchising is affected by a wide range of laws, including those which relate to trademark, antitrust, contract, tax, and technology transfer issues, currency control, foreign investment, import and export restrictions, and dispute resolution.
Why do companies franchise internationally?
International franchising is a strategic way to reduce dependence on domestic demand and grow new, future revenue and profit centers worldwide. Extending a brand globally through franchising involves low risk, requires minimal investment, and offers a huge upside potential for scaling capabilities.
What is the most common type of franchise agreement?
single unit franchiseA single unit franchise is an agreement where the franchisor grants a franchisee the right to open and operate one franchise location. This is the most common and simple type of franchise relationship.
What is a standard franchise agreement?
A franchise agreement is a contract under which the franchisor grants the franchisee the right to operate a business, or offer, sell, or distribute goods or services identified or associated with the franchisor's trademark.
What should a franchise agreement contain?
A franchise agreement will usually contain the franchisee's obligations relating to performance criteria, payment of fees (royalties, marketing fees, training fees, transfer fees, termination fees, utility levies etc.), marketing, reporting, training, supply of products and services, territory etc.
What is an example of a franchise agreement?
A franchise agreement incorporates the rights and obligations of the franchisor and franchisee to license and sell a company's intellectual property and licensing rights. Examples of businesses that use franchise agreements include: Convenience stores. Fast food and chain restaurants.
How does franchise agreement work?
Essentially, franchise agreements work by one party (the franchisor) granting another party (the franchisee) the right to operate a business under certain conditions and typically using the franchisor's branding and intellectual property.
How do you write a franchise agreement?
Sample draft for franchise agreementcarry on the business of [details] as a franchise business using the concept and image of the Cafe (“the Business”);carry on the Business from the premises at [address] (“the Property”);use the rights as set out in this Contract (“the Rights”); and.More items...•
What is an international franchise business?
International Franchising, sometimes known as Master Franchising or Master Licensing, is a method of expansion that new or established franchises can use to move into new geographical areas and markets.
How do I start an overseas franchise?
10 Tips to Franchise Your Business Internationally#1 Get an Impartial Business Evaluation. ... #2 Research Country-Specific Franchising Regulations. ... #3 Factor in Cultural and Social Differences. ... #4 Protect Your Brand. ... #5 Define Your Target Market and Unique Advantages. ... #6 Develop an Achievable Expansion Plan.More items...•
What is the primary disadvantage of franchising?
Disadvantages to franchisees include high costs and royalty payments, strict product rules, lack of support from uninterested franchisors, lack of flexibility in where to locate and how to trade, and other start-up challenges. Entering into an agreement with an interested franchisor is important.
When your profitable franchise fails simply because other similar?
The “coattail effect” When your profitable franchise fails simply because other franchisees have failed this is known as the “coattail effect”.
Status of the Developing New Franchise Law in China
The draft Franchise Regulations ("Draft Regulations") anticipated to replace the 1997 Measures concerning administrative of commercial franchising (the "1997 version") * were expected to be out by end of this year.
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What is franchise law in China?
China: Franchise Laws and Regulations 2021. ICLG - Franchise Laws and Regulations - China covers common issues in franchise laws and regulations including competition law, real estate and protecting the brand and other intellectual property - in 18 jurisdictions. Published: 21/10/2020.
What is the purpose of Article 15 of the Franchise Regulation?
Article 15 of the Franchise Regulation requires that the quality and standards of the products and services suppli ed by the franchise system comply with the law and regulations.
What should a franchisor do with a non-disclosure agreement?
Practically speaking, a franchisor should ensure that a non-disclosure agreement is properly executed and keep track of what information is disclosed and when the disclosure occurred. Narrower non-disclosure agreements, with a clear scope of the information covered, should be considered.
Which law may override a franchisor's contractual provisions?
Contractual provisions that unfairly restrict the liability of the franchisor for quality deficiencies of its products or services may be overridden by the Consumer Protection Law or other public interest legislation, such as food safety laws and regulations. 11.
Can foreign law govern franchises?
If the transaction is foreign-related, parties are generally free to select foreign law to govern their contract and other franchise documents. However, there are a number of advantages for selecting PRC law as the governing law.
Can a Chinese judge apply foreign law?
If the parties choose Chinese courts as a dispute resolution forum (which is generally recommended, as the enforcement of foreign judgments and arbitral awards is difficult in China), explaining foreign law to the judge will be expensive and cumbersome. If the judge is unclear as to the effect of the foreign law, the judge will likely apply Chinese law.
Can Chinese courts enforce non-compete?
Both in-term and post-term non-compete and non-solicitation covenants are enforceable in Chinese courts. However, overbroad restrictive clauses may not be enforced based on the doctrine of good faith set out in the Contract Law and the General Principles of Civil Law.
How long does a franchisee have to lease land?
Even if the franchisee owns the premises, the land under the building belongs to the state and is leased to the developer, usually for a term of 40 years. The franchisee may be required to vacate the premises if the lease is not renewed by the government.
What is the anti-monopoly law in China?
Article 17 (4) of the Anti-monopoly Law prohibits establishing exclusive geographical areas without justifiable cause for players with a dominant market position. Franchisors in China rarely have a significant market share that could constitute a dominant market position.
Can a foreign law govern a franchise agreement?
Parties in a foreign-related transaction may select foreign law to govern the franchise agreement; however, parties cannot contract out of the application of the franchise regulations and choosing foreign law is not always recommended.
Can you terminate a franchise agreement?
The grounds for terminating a franchise agreement must be set out in the franchise agreement. Except for the cooling-off period set out in Article 12 of the franchise regulations, there are no prescribed grounds of termination. However, any termination provisions of the franchise agreement must comply with the duty of good faith and Chapter VI of the Contract Law.
When did China start franchising?
China adopted its first franchise law in 1997, but foreign franchising remained mostly a gray area at that time until a new law was announced in 2005, which eliminated legal restrictions on foreign investment in franchising.
What is franchising in business?
Franchising allows the franchisor to grant franchisees the right to use its business model, brand, know-how, intellectual property (IP), etc. to sell its branded products and services in exchange for fees, royalties, or other compensation. It has both advantages and disadvantages when compared to other business models.
What is the purpose of a franchise contract?
The franchise contract forms the heart of a franchise and provides the basis of the cooperation between the franchisor and the franchisee.
Why is franchising important?
On one hand, franchising enables franchisors to invest less money, to leverage franchisees’ local knowledge, and to internationalize quickly to many markets.
How to gain foothold in Chinese market?
To gain a foothold in the Chinese market, franchisors are advised to familiarize themselves with the country’s regulatory structure and consumer market preferences.
How long is the China Briefing?
February 11, 2019 Posted by China Briefing Written by Zoey Ye Zhang Reading Time: 9 minutes. China is one of the biggest franchise markets in the world and a key target for international franchisors with its vast middle-class consumer base. To gain a foothold in the Chinese market, franchisors are advised to familiarize themselves with ...
When should a franchisor report to the filing authority?
Moreover, the franchisor should, before March 31 in each subsequent year, report to the filing authority the conclusion, cancellation, termination, and renewal of the franchise contract in the previous year.
What are the fastest growing franchise sectors?
The most rapidly developing franchise sectors are restaurants, real estate, education, home decoration, laundry, clothing outlets, etc. There are many opportunities for advancement in producing goods and services for middle-class consumers, which is continuously growing.
Is China a labor country?
The labor force in China is incredibly numerous and industrious, although it should be noted that there is a lack of qualified employees in the country.
Is there a high investment opportunity in China?
There are high investment business opportunities, as well as cheap franchises in China presented for review, the choice is yours.
What is a Franchise Agreement?
Franchise agreements are legal documents between a franchisor and a franchisee. They generally include franchise disclosure documents (FDDs) governed by the Federal Trade Commissions’ FTC Franchise Rule. A franchise agreement incorporates the rights and obligations of the franchisor and franchisee to license and sell a company’s intellectual property and licensing rights.
Who is involved in a franchise agreement?
The parties involved in a franchise agreement are the franchisor and franchisee. While there may be third parties involved, such as franchising lawyers and insurance companies, the center of a franchise agreement applies the primary principles described below.
Do franchise agreements have the same elements?
Franchise agreements primarily contain the same elements regardless of the type you use. There may be critical differences, however, if you need a highly specialized agreement. As such, you should always seek a customized option when drafting your contracts.
