"Franchise Industry, No Permission Without Experience"... Establishment of Minimum Standards for Franchise Business

Fair Trade Commission Revises Franchise Business Law to Allow Only Directly Operated Stores with Over One Year of Operation

[Sejong=Asia Economy Reporter Joo Sang-don] From now on, franchise headquarters must have experience operating at least one directly managed store for more than one year in order to start a franchise business.

On the 18th, the Fair Trade Commission announced that the Act on the Fair Transactions in Franchise Business and its Enforcement Decree, which include this provision, will be enforced from the 19th.

Under the previous Franchise Business Act, franchise headquarters without business experience could also participate in the franchise business. This raised concerns that unverified franchise headquarters could operate in the market. Accordingly, the newly enforced revised Franchise Business Act stipulates that only franchise headquarters with experience operating "at least one directly managed store" for "more than one year" can participate in the franchise business.

However, as an exception, franchise headquarters that operate under permits or licenses according to other laws, such as passenger car platform transportation franchise business licenses under the Passenger Transport Service Act, and those with more than one year of business operation experience in the same industry domestically or internationally, whose business content has already been verified, may participate in the franchise business even without experience operating directly managed stores.

The items to be disclosed in the information disclosure document will also be expanded. Considering the increase in franchise headquarters selling products online or through directly managed stores, which may lead to a decrease in franchisees' sales, it is stipulated that information related to product sales through online or directly managed stores by the franchise headquarters must be included in the information disclosure document.

The scope of the law’s application to small-scale franchise headquarters will also be broadened. Previously, the Franchise Business Act stipulated that for small-scale franchise headquarters with annual sales under 50 million KRW and fewer than five franchise stores, only the obligations of ▲prohibition of false or exaggerated information provision and ▲obligation to refund franchise fees would apply, considering compliance costs. However, going forward, small-scale franchise headquarters must also register their information disclosure documents with the Fair Trade Commission or the mayor/governor, provide the registered information disclosure documents to prospective franchisees, and deposit franchise fees with a third-party financial institution.

Additionally, starting from May next year, local governments will be able to impose fines not only for failure to register changes or report changes to existing franchise headquarters’ information disclosure documents but also for ▲failure to provide expected sales information and ▲failure to keep franchise contracts.

A Fair Trade Commission official said, "Only franchise headquarters with verified business content will be able to participate in the franchise business, and the expansion of information provision to prospective franchisees will greatly contribute to preventing damages to franchisees and enhancing their rights. Also, since local governments with more law enforcement personnel will be able to take administrative actions against failure to provide expected sales information and failure to keep franchise contracts, it is expected that such illegal acts will decrease."