Even With 100 Million Won in Sales, the Account Balance Is Negative... Franchise Settlement Report Reveals the Reality for Barbecue Restaurant Owners [The Pitfalls of Small Capital Startups] ②

After Loan Repayments, Even 100 Million Won in Sales Meant Losses

Editor's NoteIn South Korea, starting a franchise business often begins with taking on debt. Small business owners fall prey to the "low-capital startup" bait set by franchises desperate to expand their network, and end up trapped by aggressive loan recommendations. Even when these entrepreneurs generate sales through loans, it is difficult to actually make a profit. If business slows even slightly, they cannot hold on and are forced into bankruptcy. We examined how small business owners get lured by the "low-capital startup" trap during the franchise process, and just how dangerous excessive borrowing can be.

"Even when monthly sales reached 100 million won, my bank account balance was still in the red."

Lee Byungwook (alias, age 39), who ran an all-you-can-eat barbecue franchise last year, said this after receiving three settlement reports from headquarters. The reports Lee received were packed with details on the store’s sales, expenses, and profit as calculated by the headquarters.

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According to the settlement report, Lee’s restaurant recorded monthly sales of about 100.25 million won last year. The headquarters calculated the store’s profit by subtracting fixed expenses from sales and then adding the repayment of the headquarters-arranged loan. Based on this, the profit for Lee’s store was about 25 million won, with a profit margin of 24.6%.

The headquarters loan was money Lee borrowed from a savings bank arranged by the headquarters, nominally for interior renovation. The loan amount was about 260 million won, with an interest rate of 9.5% and a two-year repayment term. From Lee’s 100.25 million won in sales, after deducting 88.3 million won in fixed expenses, adding 8.6 million won in loan repayments and 2.4 million won for blog review promotions, the store’s profit was calculated as 25 million won. While the settlement report showed a profit of about 25 million won, after accounting for additional costs Lee actually paid while running the store, there was no money left over.

The following month, Lee again achieved nearly 100 million won in sales and a profit margin of about 20% on the settlement report, but for the same reasons, he still did not make any money. The headquarters reported 98 million won in sales and 93 million won in expenses on the settlement report, showing a profit of about 5 million won, and then included oven rental (1.3 million won) and headquarters loan repayment (12 million won) to calculate the store’s profit margin at 19.4%.

Lee said, "After repaying over 10 million won in interior renovation loans, even with 100 million won in sales, there was nothing left in my account," adding, "With sales dropping every month and the deficit widening, I realized I could not keep the business going."

The franchise headquarters reportedly demanded additional payments from store owners who had taken out loans. Headquarters said these were accumulated as reserves to be used if the owner was unable to repay the loan. The additional payments were calculated by adding a certain amount to the cost of ordering meat.

For example, ordering a box of 15kg pork belly would incur an additional charge of 60,000 won. The headquarters stipulated in the franchise disclosure document that if a store owner procured meat independently instead of ordering through headquarters, a penalty of 50 million won would be imposed. As a result, for store owners, paying an extra 60,000 won per meat order was essentially mandatory. Meat orders accounted for over 40% of fixed expenses, making it the largest single cost.

Regarding this, the headquarters explained, "The savings bank loan product is a high-value loan that is difficult to obtain based solely on the store owner’s credit, so the funds are pooled and deposited under the headquarters’ name," adding, "It is a product structured so that the owner makes up any principal and interest shortfall through additional payments when ordering meat." They further stated, "In practice, repeated missed payments by store owners have led the headquarters to cover the shortfall on their behalf."