Buying an Existing Franchise Outlet in South Korea: Transfer Approval and Liability Checks

Buying an operating franchise outlet may seem simpler than opening a new one. However, purchasing the fixtures and equipment does not, in itself, secure the right to use the brand. To take over as the new operator, you need to review three connected arrangements: the transfer agreement with the seller, the contract with the franchisor and the lease with the landlord. The key is to establish what you are taking over, whose approval is required and when you become responsible for costs before paying the balance.

1. First distinguish an asset purchase from a transfer of the franchise agreement

Ask the seller to set out in writing exactly what the transaction covers. Is it a purchase of assets such as refrigerators and fittings, a transfer of the business as a whole, or a transfer that also includes the seller’s position under the existing franchise agreement? Calling it a ‘premium agreement’ — often referred to in South Korea as a gwonrigum agreement — does not make its scope clear. If you are buying shares in the company that operates the outlet, you will need a separate review of the liabilities remaining in that company. Do not treat a share purchase in the same way.

The franchise agreement is a contract between the seller and the franchisor. Even if the seller says you can ‘simply take it over’, that does not replace the franchisor’s approval requirements or contract transfer procedures. Check the existing franchise agreement for transfer restrictions, approval assessments, buyer eligibility requirements and mandatory training. Obtain written confirmation of whether the franchisor permits a transfer of the existing agreement or requires it to be terminated and replaced with a new one.

Franchise transactions in South Korea are governed by the Fair Transactions in Franchise Business Act. This legislation sets out procedures including the registration and provision of franchise disclosure documents and the provision of franchise agreements. If the transaction involves signing a new franchise agreement, do not assume that these preliminary procedures can be skipped because you are buying an existing outlet. Even where the arrangement is described as a straightforward transfer, check which requirements apply to the actual contract structure.

When mapping out the deal, it helps to record these three elements side by side:

• What you receive from the seller: the specific assets being transferred, such as equipment, stock and business records
• What you receive from the franchisor: the contractual right to use the brand and receive operational support
• What you receive from the landlord: the right to occupy the premises and the terms relating to the lease deposit

If any of these is uncertain, you may be unable to operate the outlet properly. Assess the rights you will actually secure, rather than relying on the title of the agreement.

2. Make franchisor approval and the lease conditions for paying the balance

Ask the franchisor to confirm approval for the specific buyer and outlet. A verbal explanation from a representative, or general guidance that transfers are possible, is not enough. The approval document should identify the outlet, the buyer, the period for which approval is valid and any conditions to be met. If approval is conditional, establish who must do what and by when.

Confirm the costs at the same stage. Ask for an itemised list of any transfer assessment fees, fees for changing the registered operator and charges for entering into a new franchise agreement. It is also important to establish whether the seller’s deposit will be refunded and a new deposit required from the buyer, or whether it can be transferred through a process agreed by the franchisor. Compare the recipient and basis of each payment so that you do not pay the franchisor again for something already included in the purchase price paid to the seller.

The lease requires a separate check. Article 629 of South Korea’s Civil Act generally restricts the assignment of a lease or subletting without the landlord’s consent. Franchisor approval of the purchase does not mean the landlord has agreed to transfer the lease. Decide whether you will take over the existing lease or enter into a new one, and confirm the deposit, rent, permitted use and lease term directly with the landlord.

Consider expressly linking the transfer agreement to the following conditions:

• Written franchisor approval and completion of the necessary franchise agreement procedures
• Landlord consent to the lease transfer, or completion of a new lease
• Agreed arrangements for terminating the agreement and returning payments if the conditions are not met by the deadline
• Separate provisions allocating costs if a condition fails because one party is at fault

These are terms for the parties to negotiate, not rights that are automatically guaranteed. In particular, if you are paying the lease deposit to the seller, confirm the deposit balance recognised by the landlord and who will be entitled to its return. Avoid paying money that may be difficult to recover before the required approvals are in place.

3. List outstanding liabilities and obligations to customers

Checking only the unpaid amounts recorded in the accounts is not enough. Some costs may be billed later, including supplies from the franchisor, rent, service charges and equipment hire. Obtain account statements for each supplier or counterparty from the seller and, where possible, cross-check them against confirmation from the franchisor or the relevant counterparty. Leave amounts arising between the date of those checks and handover for a separate final reconciliation.

It is useful to track the following items in a table separate from the purchase price.

Item	Supporting records	What to address in the agreement
Amounts owed to the franchisor	Transaction statements and account confirmations	Seller’s payment deadline and what happens if payment is not made
Fixtures and equipment	Proof of purchase, hire and instalment agreements	Ownership and whether transfer is permitted
Stock	Physical stocktake and condition records	Valuation basis and excluded items
Prepaid vouchers and booking deposits	Records of issue, receipt and redemption	Who handles customer claims and bears the cost
Employee matters	Employment contracts and payroll records	Review of employment transfers and outstanding amounts

Check in particular whether the seller owns the coffee machines and point-of-sale equipment. An item is not necessarily an asset the seller is free to sell simply because it is on the premises. Hired equipment may require the owner’s consent and a change to the hire agreement.

Prepaid vouchers, loyalty credits and booking deposits may lead to customer claims after handover. Check which outlets must honour them and whether the cost falls to the franchisor or the existing operator. If you agree to provide the services, establish how that cost will be reflected in the purchase price.

A clause stating that ‘all existing liabilities remain with the seller’ does not necessarily remove all liability towards third parties. Depending on the substance of the transaction, South Korean commercial law rules on a business buyer continuing to use the seller’s trade name, or employment law issues relating to the transfer of employees, may apply. Do not draw conclusions solely from whether the same brand will be used. Seek professional advice covering the trade name and the scope of the business transfer.

4. Complete the handover reconciliation and retain supporting evidence

On the handover date, compare the asset list in the agreement with the items actually present. Check that major equipment works, verify stock quantities and equipment identification numbers, and retain photographs and a signed handover record. Recording meter readings and the precise cut-off time for the final reconciliation can also reduce disputes over utility charges and sales revenue.

For delivery orders, card payments and advance sales, the payment receipt date may differ from the sale date. Agree how to handle sales made before handover where the funds arrive afterwards, or where a transaction is subsequently cancelled. Changes to payment and operating accounts must follow each service provider’s procedures, and customer personal data must not simply be copied and handed over without a proper basis.

If some amounts remain unresolved, you can negotiate the retention of part of the balance for a specified period. To avoid creating a new dispute, record not only the amount retained but also the release conditions, the deadline for submitting evidence and the process for resolving disagreements. Agree notification and compensation procedures for liabilities discovered later that differ from the seller’s disclosures.

Practical summary: Put franchisor approval, securing the lease and settling liabilities on a single timetable. The basic safeguard when buying an existing franchise outlet is to pay the balance only once all three have been confirmed in writing and the handover reconciliation process has been agreed.