China Stories: Choosing the Wrong Company Formation Agent could Kill your Business!

Last week I had lunch with Andrea, who set up what was initially proving to be a successful business and saw it dying due to the wrong agent choice.

Andrea (and her business partner) learnt today’s tip the hard way… And she was kind enough to share it with us so that “beginner entrepreneurs” (as she describes herself at that time) don’t fall into the same trap.

Tip: Make sure you choose the right company formation agent.
– Get references that confirm their good work (or hire a reputed firm)
– Ensure they know your industry well

Story: “Go Nuts Healthy Gourmet Snack Bar” was an organic/healthy snack bar selling “Go Nuts” branded pre-packed products and in-store prepared food (sandwiches, granola/nut assortments, salads…). It was set to be quite a successful business. It quickly got a loyal clientele thanks to a unique offering and a good location (Jing An district in Shanghai).

But “Go Nuts” was also the best case study I’ve heard of how things can go absolutely wrong if you chose the wrong agent…. Not once, but TWICE!

1st Agent: It all started wrong. First agent was identified through a local expat magazine in Shanghai, City Weekend…. To cut the story short, the guy took the money and did nothing… Andrea describes him as an “impostor”.

2nd Agent: Here things went well… initially, but after 3 months operating the shop the local authorities came in for an inspection and were sorry to inform that “they needed to close the shop because the business scope did not allow them to run that type of activity”.
It turned out the business license only allowed them to sell pre-packed food & beverages. Most of their business was coming from the in-store prepared food. When they confronted their Chinese (first one was foreign) company formation agent the guy said:
“It is not my mistake, it is yours, because you chose me to do this job and I have never done food & beverage”
As you have already imagined the agent only gave them this piece of information after their shop had been closed with a 200.000 RMB fine.

As young entrepreneurs without a strong financial support their cash was gone (spent on licenses, rental, perishable food stock that went wasted, fines …). They felt there was too much uncertainty ahead (would they get the right agent, would the licenses be granted,…) and decided to close the shop.

So a few lessons learnt for the future:

1. Make sure you choose the right company formation agent.
– Get references that confirm their good work (or hire a reputed firm)
– Ensure they know your industry well

2. You MUST know what your license documents say… so be sure to have an English translation (even if you can’t use it for legal purposes). And please, get a good translation …don’t ask your neighbor or a friend to read it to you! Get the document from your agent or get a professional translator to do it.

4 comments

  1. An interesting post which sadly reflects what can be common practice. If you are looking to set up in business in China, my advice would always be to speak to a lawyer first. Most law firms will be able to give you good and reliable recommendations of agents to use to set up your business or will be able to do the work for you. Whilst using a lawyer can be expensive, frequently your first meeting is free and you will be introduced to many things you should be aware of.

    Often, as this story reflects, the legal fees will pay for themselves by saving you multiple costs you could incur if things aren’t done correctly.

    I work with a Chinese law firm who have fantastic contacts and practically all the lawyers are fluent in English with many having worked abroad, so foreigners don’t have to pay the frequently much higher costs of international firms to get an English speaking lawyer.

  2. Unfortunately this is happening oftenly but not everybody is carageous enough to talk about its failures in its businesses.

    Thank you for the tip to Andrea and for taking us down to earth about somre reality in China.

  3. You need both legal advice over set up – and someone who knows the tax situation. There’s some good hybrid firms out there with loads of experience. Spending money to get it right first time is far more cost effective than getting it wrong.