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May 19, 2013

Franchise your Way to China

Looking for franchising opportunities in China? Read this article as a quick guide.

For the purpose of this article, the term “franchisor” shall specifically refer to WFOE and Joint Venture, and the term “franchisee” shall specifically refer to all Chinese enterprise, including Chinese domestic company, WFOE, Joint Venture and others.

Threshold

Neither franchisor nor franchisee shall be an individual.

As stipulated in the Administration of Commercial Franchise (ACF), Article 3, “Neither entities, other than enterprises, nor individuals may engage in franchising activities as franchisors.”

In other words, a foreign investor would need to form and/or own a Wholly Foreign-Owned Enterprise (WFOE) or Joint Venture. Establishing such a Chinese enterprise would be the first step before franchising.

Furthermore, a qualified franchisor must own at least two directly-operated outlets, and each must have been in operation for more than one year.

Franchising Industries

Depending on products’ or services’ main features, marketing positioning, targeted customers and so on, franchising in China falls into the following seven categories:

1. Retail
Convenience stores, discount shops, special industry stores (such as toy stores, drug stores, etc.), supermarkets, online stores, ending machines, and other retail businesses.

2. Hotel & Motels
Starred hotels, budget hotels, and other types of establishments providing accommodations.

3. Catering
Western-style restaurants, Asian-style restaurants, Western-Asian mixed restaurants, hotpot restaurants, fast-food stores, cafeterias, beverage stores, and speciality food stores (such as pizza, yogurt, etc.)

4. Personal Services
Family services (such as chauffeuring, personal secretaries, etc.), healthcare products and services, senior care, Laundromats, beauty salons, spa services, saunas, fitness enters and gyms, pet services, etiquette services, tailoring and shoe repair services, wedding planning services, digital printing services, vision care services, automotive aftermarket services, building and decoration services, travel and tourism services, and so on.

5. Commercial Services
Management consulting, advertising services, payroll services, electronic products maintenance, telecommunication services, tools and hardware maintenance, logistics services, shipment and mailing services, cleaning and sanitation services, security services, community services, media services, and others.

6. Education & Training
Preschool education, tutoring, industry skills training, EQ and IQ development training, and so on.

7. Agencies
Real estate brokerage agencies, financial services, and other types of intermediary services.

Franchise Rights

In general, franchise rights are rights to registered trademark, enterprise logo, patent, know-how, etc.

Apart from those, trade secret (business secret), firm name, operation management mode and all that to be certified and recorded by authorities could be legally franchised in China.

Note: a trademark that is accepted for registration yet not approved could not be solely regarded as a franchising resource. The franchisor must have other franchisable resources.

Administration

Franchising is essentially contracting behaviours. Franchising activities are civil rights exercised by franchisors and franchisees, and they shouldn’t be subjected to government administration. Nevertheless, government regulates and supervises franchising activities – for maintaining order of the market and safeguarding the legal rights of both franchisors and franchisees.

ACF established the “franchisor filing system” requiring that franchisors have their franchising activities be on record for review and supervision. In accordance with ACF, franchising activities shall be registered on record with the Ministry of Commerce of the People’s Republic of China (MCPRC) and/or its subordinate units such as theShanghai Municipal Commission of Commerce.

Relevant Documents

MCPRC issued the Administrative Measures for Archival Filing of Commercial Franchise(AMAFCF), listing documentation to be filed with the ACF and/or its subordinate units. In brief:

  1. Basic information of the franchise, e.g., contact information of directly-operated outlets
  2. Conditions of all chain stores
  3. Franchisor’s business and/or marketing plan
  4. Business licenses of franchisor and franchisee
  5. Franchisor’s trademark, enterprise logo, patent and other franchising resources
  6. Documents that prove the franchisor’s ownership of at least two directly-operated outlets, and that each have been in operation for more than one year
  7. The very first signed franchising contract
  8. Standard franchising contract
  9. Contents of the Franchising Handbook (Must include how many pages for each chapter, total pages of the handbook. Should such handbook was printed from online system, must provide printed pages. Refer to the below note.)
  10. Franchising approval Certification for products and services
  11. For WFOEs and Joint Ventures, Foreign Investment Approval Certificate is required to be submitted, and its approved business scope thereof must include “engage in commercial activities such as franchising”
  12. Other relevant documents required by authorities

Note: Franchising Handbook refers to a document that guides the franchisee to operate a franchising business. Generally it shall stipulate: 1) management of the franchisor, 2) headquarter of the franchisor, 3) franchising process, 4) introduction to franchised products and/or services, 5) management of the chain stores, 6) after-sale services of the chain stores, 7) services management of the chain stores,8) marketing and promotion of the chain stores,9)  human resources management of the chain stores,10) training management of the train stores,11) facilities and equipment of the chain stores,12) sanitation, fire, and safety management of the chain stores,13) financial and accounting management of the chain stores, and so on.

Moreover, AMAFCF stipulates clearly the deadline for filing above mentioned documents, any changes of such information, yearly reporting requirements, filing supervision, fines, and other relevant matters with which franchisors and franchisees must be in compliance or need to pay attention.

Relevant Laws & Policies, Sources

State Council’ Regulations 行政法规
Regulations on Administration of Commercial Franchise
《商业特许经营管理条例》
国务院令第485号/现行有效/2007.02.06发布/2007.05.01实施
http://www.gov.cn/zwgk/2007-02/14/content_527207.htm

Departmental Regulations部门规章
《商业特许经营信息披露管理办法》(2012修订)
商务部令2012年第2号/现行有效/2012.02.23发布/2012.04.01实施
http://www.gov.cn/flfg/2012-03/06/content_2084101.htm

Administrative Measures for Archival Filing of Commercial Franchise
《商业特许经营备案管理办法》(2011修订)
商务部令2011年第5号/现行有效/2011.12.12发布/2012.02.01实施
http://www.gov.cn/flfg/2011-12/21/content_2025612.htm

Circulars 通知
商务部办公厅办于进一步做好商业特许经营管理工作的通知
商办流通函[2012]893号/现行有效/2012.08.17发布/2012.08.17实施

Policies 政策解读
商业特许经营法规解读,2012年10月-12月由商务部流通发展司发布
http://www.mofcom.gov.cn/article/zt_zhcjd/subjecta/201210/20121008395631.shtml
http://www.mofcom.gov.cn/article/zt_zhcjd/subjecta/201211/20121108458912.shtml
http://www.mofcom.gov.cn/article/zt_zhcjd/subjecta/201212/20121208465722.shtml
http://www.mofcom.gov.cn/article/zt_zhcjd/subjecta/201212/20121208472208.shtml

Outdated Regulations (reference only) 已失效法规
商务部令2004年第25号《商业特许经营管理办法》
商务部令2007年第16号《商业特许信息披露管理办法》
商务部2007年第15号令《商业特许经营备案管理办法》

Industrial Standard 行业标准
GB/T1.1 – 2009
《中华人民共和国国内贸易行业标准》
Industrial classification of franchise
《商业特许经营业种分类》
商务部2011-12-20 发布,2012-01-01实施。
Franchise system managerial guide
《特许经营管理体系指南》
商务部2007-01-25发布,2007-05-01实施

For further opinions regarding franchising in China, seeking legal consultancy or relevant legal services from experienced Chinese lawyers, please email us at inquiry@evaslaw.com.

Services We Offer

  • Propose and advise on strategy for franchising in China
  • Business information for the purpose of franchising
  • Review Business/Marketing Plan (“市场计划书”)
  • Advise on and review Franchising Operation Handbook (“特许经营操作手册”)
  • Advise on, draft, and review franchising contract (“特许经营合同”)
  • Propose and advise on strategy for trademark registration and protection
  • Advise on other franchising resources’ protection strategy
  • Provide franchising related laws and regulations, policies
  • Provide information on franchising-related judicial interpretations and analysis on lawsuits

May 19, 2013