Mandatory Franchise Supplies in South Korea: Check Prices and Purchasing Obligations Before Signing

When opening a franchise, the ingredients and consumables you buy every month may affect your finances for far longer than the initial franchise fee. Even within the same brand, delivery terms and minimum order quantities can change the actual cost. A healthy franchise network should protect both consistent quality and reasonable purchasing terms for franchisees. Before signing, go beyond the explanation that you ‘must buy from head office’: get written confirmation of what you must buy, why and at what price.

1. Establish which supplies are mandatory and why

Mandatory supplies are items that the franchisor requires you to buy from itself or a designated supplier. Some, such as a brand’s signature sauce, are important for maintaining a consistent taste. In other cases, purchasing restrictions extend to ordinary packaging or cleaning products. Requiring purchases from designated sources is not automatically unlawful. However, you should separately assess whether the restriction is necessary to maintain brand consistency, and whether its scope and terms are appropriate.

First, ask the franchisor for a complete purchasing list, with each item classified as ‘must be bought from a designated source’, ‘may be bought elsewhere if quality standards are met’ or ‘franchisee free to choose supplier’. Disputes can arise if a sales representative verbally says you are free to source an item yourself but the agreement or operations manual says otherwise. Ask which document takes precedence if their provisions conflict.

A list of product names alone is not enough. Request specifications, pack sizes, storage requirements, shelf life or use-by dates, and ordering units as well. Ingredients with the same name can be difficult to compare on price if their concentration and the quantities needed differ. For branded packaging, check whether you can use remaining stock after a design change.

Ask the following questions about each item to understand what the purchasing restriction means in practice.

• What quality-related reason requires this item to be bought from a designated source?
• What testing or approval process applies if I want to use a product sourced elsewhere?
• Can I use a substitute if the designated supplier cannot deliver?
• What contractual consequences apply if I change suppliers without approval?

Do not assume that a vague answer means the arrangement is unlawful. Instead, treat it as a sign that you still lack the information needed to compare prices and assess the agreement. It is sensible to postpone your decision until those points are clarified.

2. Compare pricing terms in the disclosure document and agreement

Franchise transactions in South Korea are governed by the Fair Transactions in Franchise Business Act, commonly referred to as the Franchise Act. The franchise disclosure document is a statutory document registered with the Korea Fair Trade Commission or the relevant metropolitan city or provincial authority. Registration does not mean that the government guarantees profitability or endorses every trading term. Prospective franchisees must compare the disclosed information with the contractual terms offered to them.

For mandatory supplies, the Franchise Act requires the franchise agreement to state the types of items franchisees must buy and the method used to calculate supply prices. If the franchisor merely says that prices ‘follow our logistics policy’, ask for a specific explanation of how they are set. Your future exposure will differ depending on whether prices are linked to costs or calculated by adding a fixed amount or percentage.

Review the registered disclosure document, the actual agreement and any supplementary agreements you will sign, and itemised quotations. In the disclosure document, check the required purchases and suppliers, the costs borne by franchisees, and the entries relating to supply-margin franchise fees. These entries concern remuneration the franchisor receives through supply transactions and can help reveal costs that are not apparent from the initial franchise fee or ongoing royalties alone.

However, do not treat historical averages in the disclosure document as the exact amounts you will pay. Check the reference year and the basis of the calculations, and ask why any figures differ from the current quotation. It is also worth asking for quotations to state their validity period and whether VAT is included.

As a rule, the franchisor may not enter into the agreement or accept franchise fees until 14 days have elapsed after you receive the disclosure document. This period is reduced to seven days if you obtain advice on the document from a lawyer or a qualified franchise transaction specialist, a regulated professional in South Korea. Simply viewing the document online is not necessarily the same as receiving it in the legally prescribed manner. Keep a copy of what you received and a record of the receipt date.

3. Calculate spending based on actual orders, not just unit prices

A low supply price may not be attractive if delivery charges and wastage are high. When comparing brands, assume the same scale of operation and calculate purchasing costs using the quantities you would actually order. The key point is that the amount you use is not always the amount you have to buy.

A simple spreadsheet can include ‘item, expected usage, ordering unit, order quantity, supply unit price, delivery charge and expected stock remaining’. For products sold only in packs or batches, round expected usage up to the next available ordering unit. In quieter months, more stock may remain unused; if its shelf life is short, that stock may have to be discarded.

Check the following terms alongside the quotation, as they can materially affect total spending.

• Additional delivery charges for orders below the minimum order value
• Charges for chilled or frozen deliveries, or urgent orders
• Deadlines for returning damaged, incorrectly delivered or defective goods
• Whether unsold stock can be returned
• Mandatory initial orders when new menu items are launched

Next, prepare separate calculations for normal sales and a period of weak sales. Also model an increase in supply prices, clearly marking it as an illustrative assumption. The aim is not to predict future profits, but to identify spending that will be difficult to reduce because of purchasing obligations.

Do not overlook payment timing in your cash-flow planning. If you pay for ingredients upfront but receive sales proceeds later, you will need working capital to bridge the gap. Even if purchases on credit are available, check deposits, late-payment charges and the conditions under which supplies may be suspended. If you plan to borrow to fund purchases, include interest when assessing whether the business can cope.

4. Put procedures for price changes and supply disruptions in writing

A price list valid on opening day is not enough to assess long-term purchasing terms. The Franchise Act requires franchisors to consult franchisees when changing mandatory-supply trading terms to franchisees’ disadvantage. This consultation duty should not be confused with an individual franchisee’s right to approve or veto every change.

When reviewing the agreement, check how the reasons for a change and its calculation basis will be communicated, how and by when you can submit comments, and how the outcome of consultation will be notified. Beyond the statutory requirements, specifying advance notice periods, the prices applicable to orders already placed and how price lists will be retained can reduce confusion in day-to-day operations.

You also need provisions covering supply disruptions. Ask the franchisor to specify who approves substitutes, the deadline for handling requests, what purchases are permitted in an emergency and how quality will be checked. A delivery delay by the franchisor does not automatically entitle you to compensation for every resulting loss, so review the contractual wording on costs and liability separately.

Immediately before signing, check that the product lists and pricing calculation rules referred to in the agreement are actually attached. Record each document’s date and version, and retain correspondence and final answers so that you can compare them if explanations change. It is safer to avoid signing while important terms remain marked ‘to be confirmed later’.

If problems arise once you are trading, gather notices, order histories, invoices and consultation records before unilaterally stopping purchases from designated sources. A breach of the law and a breach of contract are not necessarily the same thing. Seek a review from a qualified franchise transaction specialist or lawyer and, if necessary, consider franchise dispute mediation through the Korea Fair Trade Mediation Agency.

Action summary: Obtain and review the mandatory-supply list, supply pricing method and consultation procedure for changes together. Understanding the scope of your purchasing obligations and the terms that may change matters more than an apparently cheap unit price.