Franchise Ideas
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Franchise Ideas



FREE Franchise Consultation: Using our customized model for research, we’ll present you with 3 choices of franchise concepts to suit your tastes. This meeting will take place within 30 days of our ...

FREE Franchise Consultation: Using our customized model for research, we’ll present you with 3 choices of franchise concepts to suit your tastes. This meeting will take place within 30 days of our first consultation. Guaranteed.



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  • ==== ====FREE Franchise Consultation: Using our customized model for research, we’ll present you with 3choices of franchise concepts to suit your tastes. This meeting will take place within 30 days of ourfirst consultation. Guaranteed. ====With Chinas opening of its market and recent succession into the WTO, it has undergone rapiddevelopment in the past two decades. Due in part to such growth and in combination with itsmassive 1.3 billion population (330 million in its middle-class alone as compared to Americas totalpopulation of 300 million), it represents the worlds largest yet untapped consumer market. Formany franchisers seeking to market reliability associated with brand recognition and systematicorganizational structures to the oftentimes chaotic and fragmented consumer sector (particularlythe food and personal service industries), China will be both the largest yet most challengingopportunity in the 21st century.Fortunately for both consumers and those in the franchising industry, 2007 arguably brought aboutthe largest liberalization of this sector since the "Opening Up" reforms of 1979. That being said,however, foreign franchisers have, in the past, seen their share of successes and failures, many ofwhom have stuck it out throughout Chinas market changes to become a consumer householdname, such as McDonalds, KFC and Pizza Hut.I. Development of the franchise market in ChinaIn 1997, Chinas Ministry of Internal Trade promulgated the Administration of CommercialFranchise Procedures (Trial Implementation and hereinafter "Franchise Procedures") representingthe first set of regulations directed at specifically addressing issues pertaining to the franchisesector. The Franchise Procedures introduced two types of franchises: i) direct franchising and ii)sub-franchising. The Franchise Procedures provided for the basic structure of current franchisinglaws, which requires the disclosure of material information to prospective franchisees and includesthe following: basic information about the franchiser; operational results of the franchiser; financialresults of its franchise outlets; fees and payment obligations; and, terms and conditions for goodsand services provided to franchisees. The Franchise Procedures also established the quasi-governmental China Chain Store and Franchise Association ("CCFA"). (Note that the FranchiseProcedures were interpreted as not being applicable to cross-border franchise operations.)In 2004, as part of Chinas accession into the World Trade Organization (WTO) and commitmentto the principles therein, the Ministry of Commerce issued the Measures for the Administration ofFranchise Operations ("Franchise Measures") effective February 1st, 2005. The FranchiseMeasures were promulgated shortly after the Measures on the Administration of ForeignInvestment in the Commercial Sector, which liberalized foreign investment in the retail andwholesale distribution industry. Unlike the Franchise Procedures, the Franchise Measures not onlypermit foreign investment in the franchising sector but also contain an entire chapter draftedexclusively for this purpose.
  • Much like the Franchise Procedures, the Franchise Measures focused largely on franchiserdisclosure, but also included the "two-plus-one" requirement, which mandated franchisers tooperate two company-owned stores in China prior to commencing franchising activities. Obviously,this has prevented many start-up franchisers from immediately commencing operations in Chinaand was a disincentive for market entry. Moreover, the promulgation of the Franchise Measuresand the requirement that all franchising operations be conducted only by PRC entities haseffectively removed the alternative measures being used by foreign franchisers for many years,including licensing arrangements and international franchising agreements.There have, however, been recent modifications to the franchising framework with thepromulgation of a number of new laws in 2007 which will be further discussed below.II. Current Legal Framework and Franchising Structures in ChinaIn May of 2007, MOFCOM replaced the Franchise Measures (2005) with the Regulations on theAdministration of Commercial Franchises ("Franchise Regulations"). The Franchise Regulations,together with the MOFCOM-issued Administrative Measures for the Information Disclosure ofCommercial Franchises ("Information Disclosure Measures") and the Administrative Measures forArchival Filing of Commercial Franchises ("Archival Filing Measures") currently govern franchisingstructures in China and set out the following requirements:1. Definition and Applicability Scope of Commercial FranchisesArticle 2 of the Franchise Regulations states that the regulations are applicable to all investorsengaged in commercial franchise operations in China"Commercial Franchise" is defined in the Franchise Regulations as "business activities whereby afranchiser, through execution of agreements, allows a franchisee to use operational resources,such as a trademark, logo, patent, know-how and others which are owned by the franchisor [refersto legal (not natural) persons], and the franchisee conducts business under the unified businessmodel in accordance with the provisions of the contract and pays franchise fees to the franchiser.2. Qualifications and the Two-Plus-One RuleFranchisers must own a well-developed business model, and be capable of providing continuedoperational management, technical support, business training and other services to thefranchisee. Additionally, franchisers must own at least two company-owned stores for a period ofat least one year . Noticeably missing is the phrase "in China", which allows for new foreignentrants to immediately commence franchising activities in China.3. Filing RequirementsWithin fifteen days from executing the first franchise agreement, the franchiser must file withMOFCOM , specifically i) if the franchising activities take place within a single province,autonomous region or municipality under the central government (Beijing, Shanghai, and othermajor cities), then with the MOFCOM of that province, autonomous region or municipality underthe central government; or ii) if franchising activities take place in more than one province,
  • autonomous region or municipality, then at the national level MOFCOM.Thereafter, the relevant MOFCOM will have ten days to properly file all completed filings , andpublish them on its website. However, it is necessary to note that the franchiser must, within 30days of any change potentially impacting the filing, apply for an alteration of its filings.Franchisers must file the following:1. Basic information about the commercial franchise;2. Distribution information of franchised stores in China;3. Franchisers Commercial Prospectus;4. Copy of business license or enterprise registration;5. Copies of certificates of trademarks, patents and other business resources related to franchiseactivities;6. Sample franchise agreement;7. Franchise operational manuals;8. Marketing plan;9. Written undertaking evidencing franchisers complies with the Qualifications and the Two-Plus-One Rule;10. Certificate evidencing compliance with the Two-Plus-One rule, issued by the city level in Chinaand, for franchisers using space outside of China, business certificates translated, notarized andauthenticated by the Chinese embassy; and,11. Other documents as required.Completed filings may be canceled in the event of any of the following occurrences:1. Franchisers business license was canceled by the competent registration authority because ofillegal operations;2. MOFCOM receives a court order regarding the cancellation of the filing due to illegal operationsof the franchiser;3. Franchiser was discovered to have failed to disclose material information or provided falseinformation; and,4. Franchiser itself cancels the filing.4. Disclosure of Information. View slide
  • The following materials must be provided to the prospective franchisee a minimum of thirty daysprior to the signing of the Franchise Agreement :1. Basic information on the franchiser and franchise activities:a. Franchisers name, address, contacts, legal representative, general manager, registered capital,scope of business, and the number of regular chains including their addresses and phonenumbers;b. A brief introduction to the commercial franchise activities of the franchiser;c. Basic information on the archival filing of the franchiser;d. If the franchisers associated company provides products and services to the franchisee, theassociated companys basic information must also be disclosed; and,e. Information on any bankruptcy and/or application for bankruptcy of the franchiser or of itsassociated company in the preceding five years.2. Basic information on the business resources of the franchisera. Information available on registered trademarks, company logos, patents, proprietarytechnologies, and business methods, etc;b. If the owner of any of the above-mentioned business resources is the associated company ofthe franchiser, then the basic information of the associated company must also be disclosed (thefranchiser is also required to explain how to manage the franchise system upon termination fo thelicense contract); and,c. Information on the business resources of the franchiser (or its associated company) in relationto litigation or arbitration.3. Basic information on franchise expenses:a. If the type, amount, criteria and payment method of fees collected by the franchiser or on behalfof a third party cannot be disclosed, then the franchiser must explain the reason for the non-disclosure; if the fee collection standards are inconsistent, then the franchiser is required todisclose both the maximum and minimum standards, and explain the reason thereto;b. The collection thereof, return conditions, return time, and return on investment; and,c. If the franchisee is required to pay a fee before the Franchise Agreement is concluded, then thefranchiser must explain in writing the use of the fee and the conditions and method of return.4. Information on the prices and conditions of the products, services and equipment provided tothe franchisee. View slide
  • a. Whether the franchisee must purchase products, services or equipment from the franchiser (orits associated company), including the prices and conditions thereof;b. Whether the franchisee must purchase products, services or equipment from the suppliersappointed or approved by the franchiser; and,c. Whether the franchisee has the discretion to choose its own suppliers and the standards for theselection of its suppliers.5. Information on the continuous provision of services to the franchisee.a. Detailed content, manner of provision and implementation plans for professional training,including the training location, approach and duration; and,b. Details regarding technical support and a catalog of the operation manual of the franchiseincluding the number of pages therein.6. Methods and content of guidance and supervision over the franchise activities of the franchisee:a. The franchisers methods and content of guidance and supervision over the franchise activitiesof the franchisee, the franchisees obligations and consequences for failing to fulfill them.b. Whether the franchiser is jointly liable with the franchisee for complaints by and compensationto consumers, and how to share such liability.7. Information on the investment budget of the franchise:a. The expenditure for the investment budget may include the following: initial fee; training fee; realestate and decoration fee, procurement fee for equipment, office supplies, furniture, etc; initialinventory; water, electricity and gas fees; fees needed to obtain licenses and other governmentalapprovals; and working capital; and,b. The statistical source and estimation basis for the above-mentioned fees.8. Information on franchisees within China:a. Information on the present and estimated number of franchisees, geographical distribution,scope of license, and as to whether or not they are subject to an exclusive regional license (if so,details of the scope thereof must also be explained)b. Information on the evaluation of the performance of the franchisee, the actual or estimatedaverage sales volume, costs, gross and net profits of the franchisee, the source of the above-mentioned information duration of and franchise networks involved (if the information isspeculative, then the franchiser shall explain the basis for its speculation, and specify that theactual performance of the franchisee may differ from its speculation.9. Abstracts of the franchisers financial and accounting reports and of the audit reports in the lasttwo years audited by the accounting or auditing firms.
  • 10. Information on any major litigation or arbitration involving any franchises of the franchiser inthe last five years.a. Major litigation or arbitration refers to litigation and arbitration involving litigation fees of morethan RMB 500, 000; and,b. Basic information as to the location of the litigation or arbitration and the judgment or awardmust also be disclosed.11. Information on any record of major illegal operations of the franchiser and its legalrepresentative.a. Where either the franchiser or its legal representative has been imposed with a fine, by thecompetent administrative law enforcement authorities, exceeding not less than 300, 000 but morethan 500, 000; and,b. Where the franchiser and its legal representative have been subject to criminal penalization.12. Franchise Contracta. Sample franchise contract; andb. If the franchiser requires its franchisee to sign with the franchiser (or its associated company),other franchise contracts (sample contract shall be provided at the time of contracting).Note that where the franchiser is found to have concealed or provided false information, thefranchisee may rescind the Franchise Agreement.5. Franchise AgreementAlthough franchise contracts are in practice comprehensive and lengthy, the FranchiseRegulations require certain clauses be provided in the relevant franchise agreement:1. basic information on the franchiser and franchisee;2. content and term of the franchise;3. types, amounts and payments of franchise fees;4. specific content and manner of provision of operational guidance, business training, technicaland other services to franchisee;5. quality standards, quality control measures for the provision of products and services byfranchise operations;6. promotions and advertisements of products and services of franchise operations;
  • 7. arrangements for consumer rights, and assignment of liability in franchise operations;8. amendment, rescission and termination of the franchise agreement;9. liability for breach;10. dispute resolution; and11. other matters as agreed upon between the franchiser and franchisee .The Franchise Regulations also require the contract contain a clause setting out the time periodduring which the franchisee may rescind the agreement (post- execution of the contract) . Unlessotherwise specified, the initial term of the contract must not be less than two years. Further, wheredeposits or other fees are required prior to execution of the franchising agreement, provisions forthe use and refund of the same must be expressly stated therein. Advertising and promotionalfees collected by the franchiser must be used specifically for such stated purposes and accountingthereof should be provided to the franchisee within a timely basis.The franchiser is required to report annually, by March 31, the status of each franchise agreement.6. International/Cross-Border FranchisingInternational or cross-border franchisers must file, in accordance with the Archival FilingMeasures.7. PenaltiesPenalties for the violation of the Regulations are as follows:1. Failure to meet Qualifications (see Item 2): confiscation of illegal income, and fine of RMB100,000 to RMB 500,000;2. Franchising by individuals (natural person): confiscation of illegal income, and fine of RMB100,000 to RMB 500,000;3. Failure to complete Filing Requirements: order time limit for rectification and fine of RMB 10,000to RMB 50,000, and where franchiser fails to file within the time limit a fine of RMB 50,000 to RMB100,000 and public announcement; and,4. Failure to provide Franchise Agreement thirty days prior to the signing or failure to disclose orconcealing information relevant to the franchisee: fine of RMB 10,000 to RMB 50,000, or whereserious RMB 50,000 to RMB 100,000 and public announcement thereof.5. Grandfathering ProvisionsCompanies already conducting franchising activities have one year to file according to theFranchise Regulation.
  • III. ConclusionChina represents a tremendous opportunity for international franchise operations. Although thereare numerous challenges and complexities in establishment and operations, the recent legalchanges have largely liberalized the franchising market for foreign investors. In combination withthe current rates of economic growth, the timing is ideal for foreign franchisers to exploreopportunities in the Chinese market.For further information, please contact:Gregory SyVice-chair, International Practice GroupTel: 86-10-6517-1188Email: LeeForeign CounselEmail: M. Sy is Foreign Counsel with Grandall Legal Group. His practice includes generalcorporate/commercial work in China, particularly in the areas of international corporate structuringand transactions. Representative clients include the Consulate of the United States of America inChina (Shenyang), Embassy of Brazil, various publicly listed companies (NYSE, AIM, DAX, BSE),along with numerous other SMEs operating in a wide range of industries. Mr. Sy obtained anLL.B. from the University of Victoria (Canada), and is admitted to the New York bar. Gregorypublishes extensively on a variety of China legal issues for international and local publications,and has recently acted as chief editor for Martindales China Law Digest and regularly contributedto Lexis-Nexis.Article Source: ====FREE Franchise Consultation: Using our customized model for research, we’ll present you with 3choices of franchise concepts to suit your tastes. This meeting will take place within 30 days of ourfirst consultation. Guaranteed.
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