Commercial franchise, recognized as a low-cost expansion business model, is the transfer of intellectual property rights and intangible assets, etc. The Regulation on the Administration of Commercial Franchises explicitly stipulates the definition of Chinese commercial franchise: The term “commercial franchise” (hereinafter referred to as “franchise”) as mentioned in the present Regulations means such business operations by which an enterprise that possesses a registered trademark, enterprise mark, patent, know-how or any other business resource (hereinafter referred to as “franchiser”) confers the aforesaid business resource to any other business operator (hereinafter referred to as “franchisee”) through contract, and the franchisee conducts business operations under the uniform business model as stipulated by the contract, and pay franchising fees to the franchiser. This article aims to introduce several important problems involved in commercial franchise, specifically as follows:
(1). Legal regulations on commercial franchise
1.Qualifications requirements of franchisee
The franchisee shall have the legal qualification: 1) it should be enterprise with the qualification of a legal person. Partnership, unlimited liability enterprise and so on can not become the franchisee. 2) it must be qualified with mature business model and service ability. 3) a franchiser for engaging in franchise activities shall have two direct sales stores at least, and have conducted such business for more than one year.
2. Recording system of commercial franchise
A franchiser shall, within 15 days after the subscription of a franchise contract for the first time, submit it to the commerce department for archival filing in accordance with the present Regulations. In case a franchiser engages in any franchised operations within the scope of a province, autonomous region, or municipality directly under the Central Government, it shall report to the commerce department of the province, autonomous region or municipality directly under the Central Government for archival filling; and in case a franchiser engages in any franchised operations within the scope of two or more provinces, autonomous regions, or municipalities directly under the Central Government, it shall report to the commerce department under the State Council for archival filling.
3. Information disclosure system
The Regulation on the Administration of Commercial Franchises further regulates: “A franchiser shall provide the franchisee with the information as prescribed in Article 22 of the present Regulations and the text of the franchise contract in written form at least 20 days before the subscription of a franchise contract.”
(2). Special restrictions or requirements on foreign capital
This regulation is uniformly applicable to all enterprises engaging in commercial franchising activities within the territory of China. Foreign-funded enterprises engaging in commercial franchise base on the same establishment conditions, and enjoy the same rights and obligations, information disclosure, advertising, etc, with the domestic enterprises.
If the industry is prohibited or restricted to the foreign enterprises, franchising activities will be affected due to the trade restrictions.
(3). Notable problems involved in commercial franchise
1.Intellectual property protection
Intellectual property is the most important intangible assets of the franchisor, so it must be protected cautiously. Therefore, besides the registered trademark and patent, the franchisor shall sign non-compete agreement and confidentiality terms too.
Some enterprises choose to quickly expand their market by commercial franchising, however, they are not clear with the definition of franchise, or have no enterprise’s core products and have insufficient brand advantages. Yet, incomplete admission screening and excessive authorization is difficult to manage and control franchising members; what’s worse, it may hurt the brand image and enterprise credit. Therefore, before expand the market through franchise, enterprises must be careful to assess their own enterprise ability, complete market research, and then establish a set of relatively complete franchising process and mode, but do not expand blindly.
Personnel’s training is an important service provided by the franchisor. Standard and scientific training can improve the franchisee’s and employees’ qualifications on one hand, and it is more important to let them understand the franchisor’s corporate culture, management concept, and finally the franchisor’s operating system. Each franchisee represents the franchisor’s enterprise and brand image; therefore, personnel training can not be ignored.
4.Distempered rules and regulations
Some franchising enterprises haven’t formulated operation training manual, SOC, management development manual or quality reference manual before concessionary management. Furthermore, some enterprises only provide trademark, trade name, product, but lack of perfect rules and regulations to help to build up a good routine operations management system. In addition, supervisions and guidance on the managing system are also insufficient. This will make the franchising system get no promotion, manage problems hard to resolve, and even cause franchising relationship broke down finally.
5.Image or the service is not harmonious and unified
Bad personnel training, franchising management system, incomplete rules and regulations, often can cause discordance of image and service, and thus bring negative effect to brand image. In addition, a franchise headquarters dedicating to “authorization, communication, support, control” will realize to coordinate and unity the images and services.
6.Functions of self-operated stores
In addition to the legal requirements that Franchisor shall have two self-owned stores, it is also very important from business and marketing aspects. Self-operated stores with good services and management can attract more potential members; on the other hand, regular chain can facilitate the franchisor to do personnel training, making it more intuitive to feel the franchisor’s business model. In addition, regular chain can also be the reference standard which will make the franchising stores to measure their own services and operating status.
About the Author
Sino-Link Consulting is a comprehensive consulting firm based in Beijing, aiming at providing the full spectrum of international business and legal consulting services for clients interested in manufacturing, investing, or opening an office or factories in China. The One-Stop services provided by Sino-Link are recognized as convenient, efficient, and effective.