Franchising an Existing Business in Japan: Preparing Pre-Contract Disclosures and Explanations

When turning an existing business into a franchise, preparing a contract alone does not give prospective franchisees everything they need to make an informed decision. They need to understand, before signing, what support the franchisor will provide and what responsibilities they will bear. To build a trusted franchise network, treat document preparation, explanations, questions and record-keeping as one integrated process.

1. First, check which disclosure obligations apply to your business

Japan has no comprehensive franchise-specific law covering all franchises, nor a general registration system for operating as a franchisor. However, franchisors that meet certain criteria must disclose information before entering into a contract. Check these requirements separately from any licences or permits required for the business itself.

Article 11 of Japan’s Act on the Promotion of Small and Medium-sized Retail Business requires franchisors operating a “specified chain business” under the Act to provide prospective small and medium-sized retail franchisees with a document containing prescribed information, and to explain its contents before the contract is concluded. Handing over the document is not enough: its contents must also be explained.

The requirements cover arrangements that primarily involve small and medium-sized retailers as franchisees and meet criteria such as the ongoing sale or arrangement of sales of goods and provision of management guidance under standardised contracts, permission to use trade marks or similar identifiers, and the collection of money when franchisees join. The framework mainly concerns retail arrangements, including food service, but the label used for a business does not determine whether it falls within scope. Assess the actual arrangements for supplying goods, providing guidance, using branding and collecting payments.

Even where this Act’s disclosure requirements do not apply, Japan’s Antimonopoly Act does. The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act address matters including disclosure during franchise recruitment. These are guidelines on how the Antimonopoly Act applies, not a separate disclosure law. Recruitment practices that fail to provide sufficient material information and misleadingly present an opportunity as substantially more favourable than it really is may raise concerns as deceptive customer inducement. General laws, including the Civil Code, also govern matters such as contract formation, performance and damages.

2. Assign supporting evidence and a responsible person to each disclosure item

The first task is not to produce a recruitment brochure. It is to list the information your business needs to disclose and verify its sources. If statutory disclosure requirements apply, use the current requirements of the Act on the Promotion of Small and Medium-sized Retail Business and its implementing regulations as your baseline.

Your internal tracking table should include at least the following fields:

• Information to disclose: the franchisor’s profile, financial information, changes in outlet numbers, payments collected, terms of supply and management guidance, for example.
• Supporting evidence: company registration details, financial statements, outlet registers, draft contracts and training plans.
• Person responsible for verification: the person in finance, operations or franchise recruitment who checks accuracy.
• Reference date and update triggers: the date to which the information relates and the changes that require a review.
• Related contract clauses: the corresponding provisions in the disclosure document and contract.

This is an example of a tracking table, not a complete list of statutory disclosure items. Check all required items, including opening hours, the opening of nearby outlets, and prohibitions or restrictions placed on franchisees.

A newly established franchisor must not invent a track record it does not have. If there is no history of franchisee operations, state that clearly and distinguish it from experience gained through company-owned outlets. Similarly, describe planned future support separately from support you can currently provide. Do not present arrangements still under consideration as firm commitments.

3. Keep recruitment materials, disclosure documents and contract explanations consistent

Even if the disclosure document is accurate, making different promises at presentations or individual meetings can create misunderstandings. Before recruitment begins, compare the wording used for the same topics across advertisements, presentation materials, disclosure documents and draft contracts.

Pay particular attention to the scope of franchisor support. A statement such as “full support with opening” could imply that the franchisor will handle everything from finding premises and applying for licences to recruitment and on-site training. Specify who is responsible for each task, what the fees cover and which services carry additional charges.

For training, for example, check who will attend, where it will take place, what it will cover, who pays travel and other expenses, and how additional training will be handled. For ongoing operational guidance, distinguish site visits from remote support, and do not blur the distinction between contractual commitments and assistance offered according to circumstances.

Prepare a shared set of approved answers so that sales staff do not improvise responses. For questions about matters that remain undecided, establish a process for checking the facts and replying in writing rather than making promises on the spot. Any individually negotiated terms should be approved by an authorised manager and checked for consistency with the disclosures and contract documents.

4. Allow time for consideration between disclosure and signing

Design the process in this order: provide the disclosure document and draft contract, explain them, receive questions, answer them, carry out a final check, and then sign. Where statutory disclosure requirements apply, the required documents must be provided and explained before the contract is concluded.

Do not suggest that Article 11 of the Act on the Promotion of Small and Medium-sized Retail Business imposes a fixed statutory number of days before signing that applies to every case. Equally, handing over a large volume of material immediately before signing makes proper consideration difficult. Allow time proportionate to the complexity of the terms so that candidates can consult family members, co-investors, lawyers or tax advisers.

An explanation session should involve more than simply reading the documents aloud. For example, ask candidates to explain the following in their own words:

• Which decisions, responsibilities and costs remain theirs, despite the franchisor’s support?
• Which aspects of running the business can they decide freely, and which are restricted?
• What payments will arise after signing?
• Is any information they currently need to make a decision still missing?

This is a discussion designed to identify gaps in the explanation, not a pass-or-fail test. A signed acknowledgement does not remedy inaccurate explanations or omissions of material information. If important terms change before signing, highlight the changes, explain them again and allow further time for consideration.

5. Keep records of explanations and use them to improve future recruitment

For each candidate, keep a consolidated record of the document versions supplied, the dates they were provided and explained, who gave the explanation, who attended, questions raised, answers given and unresolved issues. The key is to record which terms were discussed and what was confirmed, rather than simply ticking a box marked “explained”.

At signing, someone other than the recruitment representative should also check that the final contract matches the terms previously explained. Establish an internal rule that signing must not proceed while important questions remain unanswered or inconsistencies between documents remain unresolved.

The records you retain may contain personal information, such as details of a candidate’s assets or employment history. Taking account of Japan’s Act on the Protection of Personal Information, set rules for the purposes of use, access permissions, security measures, retention periods and deletion methods. Keeping evidence of explanations is not the same as retaining information indefinitely.

If the same questions recur as recruitment continues, do not simply put this down to candidates failing to understand. Review the wording of your materials and the terms of your support. Have a lawyer familiar with Japanese franchise agreements check the applicable laws and document contents, and ensure that explanations given in practice remain consistent with them.

Practical takeaway: Start by creating a tracking table covering “disclosure item, supporting evidence, responsible person and update date”, then run a practice explanation session. Resolving important questions you cannot yet answer before recruiting franchisees will help you build a sound franchise network.