Turning an Existing Business into a Franchise: Rules for Franchisee Online Sales and Sales Channels

When turning an existing business into a franchise, it is easy to establish in-store sales procedures while leaving franchisees’ online sales arrangements unresolved. If the franchisor’s online shop, franchisees’ own websites and third-party marketplaces operate alongside one another, responsibility for sales and costs can also become unclear. To maintain trust across the franchise network, specify which sales channels may be used, and on what terms, before you start recruiting franchisees.

1. Start with roles in each transaction, not sales channels

The first thing to prepare is not a list of prohibited websites, but a table assigning responsibilities from the receipt of an online order through to completion of the transaction. Even for orders placed through the same franchisor website, responsibilities differ depending on whether the franchisor is the seller and the franchisee dispatches the goods, or the franchisee is the seller.

At a minimum, distinguish between the following arrangements:

• The franchisor takes the order, sells the goods and dispatches them from its own stock.
• Orders are placed through the franchisor’s website, but the franchisee sells and dispatches the goods.
• The franchisee sells through its own online shop or a third-party marketplace.
• Customers reserve products online and collect them from a franchisee’s shop.

For each arrangement, identify the seller, the stock owner, the recipient of payment, the party responsible for dispatch and the party handling returns. Simply stating that ‘the franchisor manages the website’ does not establish who is responsible to the customer.

For example, if a franchisee dispatches goods ordered through the franchisor, clarify who pays for packing, handles delivery problems and contacts customers when items are out of stock. Do not launch an arrangement that requires franchisees to carry out work before agreeing their remuneration and how payments will be settled.

Even if company-owned outlets already sell online, do not simply copy that system. Review whether its terms are suitable for entrusting work to an independent business.

2. Make restrictions justifiable rather than imposing blanket bans

Japan has no single law comprehensively governing franchising. This does not mean the sector is unregulated: transactions between franchisors and franchisees are subject to Japan’s Antimonopoly Act.

The Japan Fair Trade Commission’s guidelines on franchising under the Antimonopoly Act explain that restrictions needed to protect trade secrets or maintain a consistent brand image, for example, are not necessarily problematic. However, restrictions that go beyond what is needed to conduct the business properly, or conduct that unfairly disadvantages franchisees, may constitute trading on restrictive terms, abuse of a superior bargaining position or other infringements.

A ban on online sales or the use of online marketplaces does not automatically become valid or lawful simply because it appears in the contract. The assessment depends on the circumstances, so document the purpose and necessity of each restriction and seek specialist advice.

When reviewing restrictions, record these three points for each one:

• What needs protecting: What is the specific objective, such as product safety, quality during delivery or adequate information for customers?
• The anticipated problem: What difficulties would arise from using that sales channel?
• Alternatives: Could delivery requirements or product-page standards address the issue instead of a complete ban?

For products requiring temperature control, for example, you could specify delivery methods, packaging requirements and permitted dispatch days. Rather than assuming that quality cannot be maintained online, consider collection in store and delivery methods that allow adequate control.

Avoid broadly closing off franchisees’ sales channels simply to prevent competition with the franchisor’s online shop. Equally, do not use sales-channel approval to introduce uniform selling prices indirectly. Any price restrictions require a separate assessment under the Antimonopoly Act.

3. Turn approval conditions into procedures franchisees can follow

If franchisees need prior approval to sell online, the process must not depend on the personal preferences of the franchisor’s staff. Vague conditions such as ‘appropriate for the brand’ do not allow prospective franchisees to estimate the investment and preparation required.

Limit application requirements to what is needed for the assessment, such as the products to be sold, the website or marketplace to be used, sample product pages, dispatch arrangements and returns procedures. The franchisor should identify who will review applications, set an indicative response time and establish how amendments will be requested. It should also be able to explain any refusal.

The operating manual could cover the following:

• Which product images and descriptions may be used, and how far they may be modified.
• How stock availability is updated, and the communication procedure for stock shortages or dispatch delays.
• Practical standards for packing, delivery and handling returns.
• How to make the seller’s identity and contact details clear to customers.
• Who to notify if an online marketplace changes its technical requirements or suspends an account.

Before implementation, check the requirements for mail-order advertising disclosures and the display of returns conditions under Japan’s Act on Specified Commercial Transactions, as well as advertising rules under the Act against Unjustifiable Premiums and Misleading Representations. If customer information is handled between the franchisor and franchisees, arrangements must also comply with the Act on the Protection of Personal Information. Even when using pages prepared by the franchisor, check that the disclosures reflect the actual seller.

Trial the system in company-owned outlets or a similar setting, testing the entire process from order receipt to returns. Look beyond the appearance of the web pages: check whether staff can realistically follow the procedures when in-store duties and dispatch work overlap.

4. Explain available channels and costs clearly before signing

Article 11 of Japan’s Small and Medium-sized Retail Business Promotion Act requires franchisors falling within its definition of a specified chain business to provide prospective franchisees with a written document covering matters such as an outline of the business and the main contractual terms, and to explain it before the contract is signed. Not every franchise agreement falls within this requirement, so check whether it applies.

Even outside the Act’s scope, the Japan Fair Trade Commission’s guidelines emphasise disclosure that helps prospective franchisees make informed decisions. Restrictions on online sales affect revenue opportunities and additional costs. Rather than leaving the details until after opening, provide enough information for applicants to assess them before signing.

In the agreement and supporting documents, distinguish between available sales channels, activities requiring approval and prohibited activities. Also specify who pays for website development, marketplace charges, payment processing fees, delivery and returns, and how those costs are calculated. Make clear whether participation in any future franchisor-run online shop will be optional and whether franchisees will be expected to dispatch orders.

Set out graduated responses to breaches. Consider procedures proportionate to the problem: a request to correct a minor disclosure error, for example, or suspension of sales of a product where safety is at issue. Define the scope of any suspension, the conditions for resuming sales and who makes the decision. Avoid shutting down an entire sales channel without justification.

Practical takeaway: Start with a one-page summary of the online sales arrangements you envisage, identifying the seller, who performs each task and who bears the costs. Then review whether each restriction is necessary and translate it into approval criteria you can explain before the contract is signed. This provides a manageable starting point.