China question: What are the most common legal challenges when expanding a franchise?

The specialist perspective

When setting up a franchise in China, there are many legal issues you need to consider. You need to make sure that the legal entity you want to be the franchisor (only enterprises can be franchisors) has owned and operated a minimum of two company-owned units, for more than one year, for each unit. This is the famous 2+1 issue for anyone who will engage in franchising. It is the minimum requirement for a company to be legally qualified as a franchisor, according to current legislation. However, the two company-owned units are not strictly required to be located within the PRC, which means as long as a company has owned and operated the two company-owned units anywhere in the world, for more than one year for each unit, the 2+1 issue will not be a barrier for them.

You should also make sure that the legal entity you want to be the franchisor has the right to use any related intellectual property that is closely associated with the business format of your franchise. Basically, the prospective franchisor should have the trademark registered in China before it signs a franchise contract with a franchisee. Considering that it will take some time for a trademark to be registered in China, it is advisable for you to start this process as soon as possible.