Franchising an Existing Business in Japan: How to Check Whether It Qualifies as a Specified Chain Business

When turning an existing business into a franchise in Japan, the first question is which laws will apply to your proposed model. Calling an outlet an ‘approved outlet’ rather than a ‘franchise outlet’ does not determine its legal treatment: the name of the agreement is not decisive. To build a healthy franchise network, map out the commercial arrangements before recruiting franchisees and check whether they constitute a ‘specified chain business’ under Japan’s Act on the Promotion of Small and Medium-sized Retail Business.

1. Map the business relationships before drafting the agreement

Japan has no single law comprehensively governing all franchises, nor a franchise-specific registration system that applies uniformly to franchisors and franchisees. However, certain arrangements fall under the Act on the Promotion of Small and Medium-sized Retail Business. The Civil Code governs contractual relationships, while the Antimonopoly Act and other legislation apply to dealings between franchisors and franchisees. Do not assume that no registration means no legal preparation is needed.

Start by putting the relationships between the franchisor, prospective franchisees, suppliers and customers on a single diagram. Use arrows to show who sells goods to whom, who receives payment and who provides operational guidance. Even where goods are delivered directly from suppliers to outlets without passing through the franchisor, the franchisor may still be arranging those sales. Check the flow of orders, contracts and invoices, not just the movement of goods.

Then prepare the following documents:

• A draft franchise agreement and any accompanying draft agreements for product supply and guidance
• A list of all payments to be received on joining and after opening
• Conditions governing the use of trade marks, trade names, signage and similar branding
• Specific details of product supply and management guidance
• Details of the business activities and size of prospective franchisees

Where documentation is missing, the issue may be more than incomplete paperwork: the underlying arrangement may not yet have been settled. Replace vague wording such as ‘the franchisor will provide support as appropriate’ with specific details of who will actually do what.

2. Check the six criteria against supporting documents

Japan’s Small and Medium Enterprise Agency explains that an arrangement meeting the following six criteria is regarded as a specified chain business. Your checklist should record not only your conclusion for each criterion, but also the contractual clauses or transaction documents supporting it.

① The franchisees are primarily small and medium-sized retailers. Check the businesses that will join the network, rather than the activities of company-owned outlets. Restaurants may also fall within scope. Do not assume that an outlet is excluded simply because it mainly provides services; establish what its operator will sell.

② The business operates under agreements based on standard terms. Check whether you intend to recruit franchisees on common contractual terms. Differences in rent or opening dates between franchisees do not, by themselves, mean that the agreements are not based on standard terms.

③ Goods are sold, or their sale is arranged, on an ongoing basis. This is not limited to direct sales by the franchisor. Check the franchisor’s involvement in transactions through suppliers as well. Separating equipment sold at start-up from ongoing product supplies after opening will make the assessment clearer.

④ Management guidance is provided on an ongoing basis. List not only pre-opening training but also post-opening outlet visits, management advice, sales analysis and other support. For each activity, compare what the contract promises with what will actually be provided.

⑤ The agreement provides for the use of a particular trade mark, trade name or other identifying sign. Consider not just outlet names, but also plans to use shared branding on signage, packaging, booking pages and elsewhere. Distinguish between simply introducing a brand and allowing franchisees to use it to identify their own businesses.

⑥ The agreement provides for the collection of an initial franchise fee, security deposit or other payment on joining. Renaming a payment an ‘approval fee’ or ‘set-up fee’ does not necessarily put it outside the scope of this criterion. Check why each payment is collected, when it is due and how much it is.

This is not a points-based exercise in counting how many boxes you can tick. If anything is unclear, do not fill the gaps with assumptions. Show your draft agreements and relationship diagram to a lawyer familiar with Japanese franchise agreements and seek their advice.

3. Avoid misjudgements based on labels or separate agreements

The Small and Medium Enterprise Agency explains that voluntary chains and authorised dealer arrangements also qualify as specified chain businesses if they meet all six criteria. Describing an arrangement as ‘a licence agreement, not a franchise agreement’ is therefore not enough to determine whether the rules apply.

For example, if you plan to supply ingredients continuously to restaurants operating under a shared brand, provide management guidance under standard contractual terms and collect a payment on joining, you need to examine all six criteria in detail. Conversely, even a retail or restaurant business does not qualify as a specified chain business if it fails to meet the six criteria—for example, where product supply is not a contractual condition.

Take particular care where brand use, product supply and guidance are covered by separate agreements. Do not reach a conclusion simply because the paperwork has been split up. Check how the agreements connect and what they collectively commit the parties to doing.

The aim should be a legal assessment that reflects the actual arrangements, not merely a change of wording designed to avoid classification. Rather than recording only ‘outside scope’, note which criteria you believe are not met, your reasons and the date of the assessment.

4. Use the assessment to guide recruitment preparations and future reviews

If the arrangement qualifies as a specified chain business, Article 11 of the Act on the Promotion of Small and Medium-sized Retail Business requires the franchisor to give prospective franchisees a written document setting out matters such as an outline of the business and the principal terms of the agreement, and to explain its contents before the agreement is signed. Check the Act’s implementing regulations when preparing the specific disclosures required.

Even if the arrangement does not qualify, this does not mean that important terms need not be explained. The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act cover a broad range of franchise dealings, not just retail and restaurant businesses. These guidelines are not a separate registration law; they explain how the Antimonopoly Act applies.

The guidelines emphasise the importance of disclosing information that prospective franchisees need to make an informed decision. After the agreement is signed, conduct such as a franchisor exploiting its superior bargaining position to impose unfair disadvantages on franchisees may also raise issues under the Antimonopoly Act. Franchisees are independent businesses, not branches of the franchisor.

Finally, do not treat this assessment as a one-off task. When introducing new product supplies or joining fees, changing brand-use conditions or making similar changes, reassess their effect on the six criteria. Keep a record of the person responsible, the review date, the grounds for the decision and the changes that should trigger another review. This will help prevent issues being overlooked as the model evolves.

Practical takeaway: Before preparing recruitment materials, complete a diagram of the commercial relationships and a checklist covering all six criteria. Examining how the arrangement works, rather than what it is called, is the starting point for building trust across your franchise network.