Franchise or Dealership? How to Check the Substance of a Deal Before Starting a Branded Business

If you are planning to start a branded business in South Korea and the brand operator tells you, “You are a partner outlet, not a franchisee, so there is no disclosure document”, what should you check? Whether an arrangement constitutes a franchise is not determined by the title on the contract. You need to consider the use of the brand name, operating standards, training and control, payments, and the ongoing nature of the relationship together. Start by identifying the rights and obligations the parties actually exchange, rather than debating the contract’s name.

1. Check five features of the arrangement, not just the contract title

Article 2(1) of South Korea’s Fair Transactions in Franchise Business Act defines a franchise business as a continuing commercial relationship. Under this arrangement, the franchisee uses the franchisor’s business identifiers, sells goods or services according to specified quality standards or business methods, receives support and training and is subject to the franchisor’s control, and pays franchise fees in return. In practice, it helps to check the following five points.

• Use of business identifiers: Are you authorised to use the operator’s brand on signs, as a trading name or on packaging?
• Common operating standards: Are the products or services, recipes, premises standards or other operating requirements prescribed?
• Support, training and control: Do you receive training or operational guidance, and are there consequences for failing to follow the standards?
• Payments in return: Do you pay, in substance, for brand use and operational support?
• A continuing relationship: Do supply, guidance, inspections or other dealings continue after opening?

Do not simply tick each item as applicable. Record the supporting documents and the explanations you have received. For example, if training is described as optional but supplies are stopped when you do not attend, there is a gap between the wording and the way the arrangement works. Conversely, receiving supplies alone does not make every dealership arrangement a franchise.

A business identifier does not necessarily have to be a registered trade mark. What matters is whether third parties can recognise it as a distinctive identifier. So the explanation “It is not a franchise agreement because the trade mark has not yet been registered” is not conclusive in itself.

2. Ask what ‘no joining fee’ and ‘independent operation’ actually mean

An advertisement promising no franchise fee is the starting point for checking costs, not the end of the legal assessment. The statutory meaning of franchise fees is not limited to amounts labelled ‘franchise fee’ in the contract. Payments described as training fees, initial payments or support fees may also need to be examined if, in substance, they pay for brand use or operational support. Payments made through product supply arrangements should also be checked to see whether they fall within the statutory definition.

However, you should not assume that the entire purchase price of goods is a franchise fee simply because you buy stock. The purpose of the payment, supply terms, its relationship to an appropriate wholesale price and other specific circumstances need to be considered. Ask the operator what each charge in the quotation covers and whether you could buy the goods on the same terms without entering into the agreement.

‘Independent operation’ also needs to be translated into specific questions. Find out what happens if you do not follow the recommended sales methods or attend designated training. The key issue is whether this leads to corrective instructions, supply restrictions or withdrawal of permission to use the brand. By contrast, an arrangement in which advice is offered but there is no penalty for ignoring it may be assessed differently.

For example, an arrangement that permits use of a branded sign and offers temporary advice only at opening differs from one involving monthly outlet inspections and mandatory compliance with recipes. In either case, look beyond a single clause and assess the actual support and control, the payments made and the continuity of the relationship together.

3. Summarise the whole arrangement on one page, even if there are separate contracts

A trade mark licence, a supply agreement and a training application may look like independent transactions when presented separately. But if you must enter into all of them to open a branded outlet, you need to examine how they are linked. Having several documents does not, by itself, change whether the arrangement constitutes a franchise.

Your summary for review should include:

• The counterparty to each contract and the person or company that actually receives each payment
• Each payment item, when it is due, and the rights or services you receive in return
• Whether any agreement requires you to enter into another agreement
• The effect of terminating one agreement on the others
• Who issues instructions and checks compliance after the outlet opens

For example, one company may handle recruitment discussions, another may collect training fees and a separate supplier may provide the goods. Do not assume they are the same company simply because their trading names are similar. Check each party’s legal name and contractual role, and distinguish between the entity authorising brand use and the entity controlling operations.

Keep consultation materials, recruitment advertisements, quotations, emails and messages in date order. In particular, obtain written confirmation of statements such as “You only need to sign this agreement” or “The other agreements are mandatory”. Resolve any discrepancies between verbal explanations and the written contracts before proceeding.

4. If it is a franchise, check the protective procedures too

If the arrangement constitutes a franchise and the relevant obligations apply to the operator, it must follow the procedures under the Fair Transactions in Franchise Business Act. Article 6-2 provides for registration of the disclosure document, while Article 7 covers matters including provision of the registered document to prospective franchisees. Calling the contract a ‘partnership arrangement’ does not remove these obligations.

As a general rule, the operator must not enter into a franchise agreement or accept franchise fees until 14 days have passed since it provided the registered disclosure document. This period may be shortened to seven days if the prospective franchisee receives advice on the document from a lawyer or a qualified franchise transaction adviser in South Korea. However, whether a transaction constitutes a franchise and whether individual statutory provisions apply are separate questions. The Act contains exclusions and exceptions for certain small-scale arrangements and other cases, so the specific conditions need to be checked.

If the operator claims the law does not apply, request its reasons in writing. The key distinction is whether it means “This arrangement does not meet the definition of a franchise” or “A specific statutory exclusion applies”. Do not accept that all protective procedures are unnecessary merely because the brand is small.

Registration of a disclosure document does not mean the government guarantees profitability or the safety of the contract. Checking registration, assessing the substance of the arrangement and evaluating its commercial viability are all necessary, separate tasks.

5. Gather the evidence you need before transferring money

If the classification remains unclear, do not rush to sign or transfer money simply to secure access to the brand. The legal nature of a reservation deposit or training application payment is not determined by its name alone. A safer approach is to gather all draft agreements, cost breakdowns, operating standards and the operator’s explanations, then have a qualified franchise transaction adviser or lawyer review them together.

When seeking advice, go beyond asking, “Is this a franchise agreement?” Ask which of the five features are present, what further facts need to be established and whether the disclosure document obligations apply. If the arrangement is genuinely an ordinary dealership or trade mark licence, the relevant rules under South Korea’s Civil Act and Commercial Act should be reviewed separately, along with the Act on the Regulation of Terms and Conditions where standard terms are involved. A finding that an arrangement is not a franchise does not mean there is no legal protection.

Practical takeaway: Before focusing on the contract title, check brand use, operational control, costs and the continuing nature of the relationship. A practical starting point is to summarise the whole arrangement on one page and defer signing and payment until the applicable legal position has been explained.