The specialist perspective

As Chinese consumers earn more discretionary income, they chase quality, brand, convenience and service. Many trends indicate that the China market continues to be ripe for franchises.

Franchise structure considerations are key in China, particularly where fewer sectors are being constrained by foreign investment, and where structure, once chosen, will determine the franchisor's flexibility for control, financing, foreign exchange, import, licensing and repatriation of franchise fees.

Find the right franchisee

Since a franchisor is not required to own a minimum of two company-owned units within the territory of the PRC, offshore franchising has been widely adapted by international franchisors.

However, the biggest problem with offshore franchising is still finding qualified franchisees. Success or failure for the international franchisor in China can depend critically upon an initial choice of a company as the local, regional, or country franchisee. Due diligence resources to fully check on a local company are improving, but it is still difficult to find companies with the management skills, business track record, language command and capital to acquire and properly develop an international franchise business in China.

One size does not fit all

From a business perspective, China has many markets. The size of China, and its diversity of business and culture, makes franchise development difficult. Companies that function well in one region seldom function as well elsewhere in China. Accordingly, it is not recommended for an international franchisor to grant a company a country franchise for all of China. More typically, franchisors grant regional franchises (a group of provinces) or first-tier city franchises (such as for Beijing and Shanghai).


James Liu, FranChina, Beijing

The law firm perspective

China's rapidly-swelling middle class provides great opportunities for international brands, and many have chosen to expand quickly and relatively cheaply by franchising. Meanwhile, the country's developing legal system and its cultural and language differences amplify significantly all of the problems that businesses commonly face when entering any new country.

We have seen a host of problems between international franchisors and their Chinese partners. Among others, Chinese franchisees may replicate the foreign franchisor's business model, trademark or know-how, and use them to compete with the franchise. Local managers may fail to operate the business according to the required standards, leading to a deterioration of brand image and/or failure in the new market. Disputes could arise in relation to dishonest or incomplete reporting of information. Finally, foreign partners may find that enforcing contract terms in China can be an experience that falls below their expectations.

Examine your local partner

Many of these problems arise from misplaced trust. Investors are often attracted to the franchise model, in part because they want to simply sign a contract, leave it to the local partner to run the business pursuant to their standard rules, and collect – but this requires placing an absolute trust in local partners, many of whom the franchisor does not actually know well yet. While it is clearly important to hire professionals to draft a thorough contract – cultural differences mean vastly different assumptions on many issues – more fundamentally, an investor must carefully vet potential domestic partners to ensure a good agreement also has a good chance to be properly implemented.

Solve disputes abroad

Avoid local dispute resolution venues if possible. Common recommendations are Hong Kong or Singapore arbitrations.

Get access to direct information

Forming a joint venture to serve as the master franchisee is often recommended because it provides the foreign investor with direct information access, as well as a degree of statutory and contractual control. Investors should also consider establishing their own representative office, or otherwise hiring at least one Chinese national, to keep their own loyal “eyes and ears” on the local market, rather than trusting everything the local partner reports about the market.

Form allies

Franchisors should also seek to control relationships with landlords for key desirable locations, with key suppliers, and with local government – so that in a potential dispute with the local partner, such third parties will more likely respect the investor's rights.

Train your staff

Providing extensive training and guidance will not only ensure the competency of local managers and staff to maintain standards, but will also help to create a sense of loyalty to the licensed brand rather than to the local partner. Make sure the contract mandates specific training requirements, and provides clear and harsh penalties for the franchisee's failure to comply.

Register your trademarks

It is important to register trademarks in China immediately, and in all relevant classes. Register the most widely used Chinese version of your brand; if one does not exist yet, make one and register it. Do not trust your local partner to do these for you out of convenience, keep total control of this process. Too many franchisors cut corners here to their own dismay: Chinese professional trademark squatters are fast, resourceful and creative; Chinese partners often abuse trusts and register trademarks in their own name; and oftentimes only the Chinese version of the mark is significant to the Chinese consumers.

Protect your secrets

Finally, there's a saying: “there's no secret in China”. Whether this is true, if you have any key know-how that can be easily replicated and you absolutely cannot afford to lose, try not to make it fully available to your local partners if possible, otherwise you must be fully prepared for this risk. Many investors consider the practical penalties and remedies available under the Chinese legal system for abuse of confidential information underwhelming.

Overall, many international franchises have already done well in China. The consumer market is large and is still expanding, and great opportunities still remain. Just ensure you prepare for the pitfalls that come with the great opportunities.


Richard Lee, AllBright Law Offices, Shanghai