Contract checks before moving into franchising: can know-how transfer and trademark licensing count as a franchise?

When sharing an existing shop’s recipes or service methods with another business, you may have no initial intention of becoming a franchisor. Yet arrangements that begin as ‘know-how transfer’, ‘brand partnerships’ or ‘trademark licensing’ may qualify as franchises, depending on how they operate in practice. The first step towards building a franchise network is not choosing a contract title, but establishing what you provide to the other business and what you receive in return.

1. Look at the actual business arrangement before the contract title

South Korea regulates franchising separately under the Fair Transactions in Franchise Business Act, commonly referred to as the Franchise Act. Article 2(1) sets out the criteria for identifying a franchise business. The key elements are the use of business identifiers, prescribed quality standards or operating methods, support, training and control by the franchisor, payment of franchise fees in return, and an ongoing business relationship.

Simply stating ‘this agreement is not a franchise agreement’ in a contract does not determine whether the Act applies. Equally, supplying the same products or providing a one-off lesson in cooking techniques does not automatically make an arrangement a franchise. The relevant criteria must be considered together.

For example, providing one-off cooking training to a shop trading under its own name is structurally different from requiring a shop to display the same brand signage, follow specified recipes and undergo ongoing operational checks. Using the same ‘know-how transfer agreement’ for both arrangements may leave the parties’ actual rights and obligations inadequately reflected in the documents.

Do not rely solely on the business owner’s explanation when carrying out the assessment. Gather and compare the draft contract, recruitment materials, training schedules, order records, invoices, shop inspection checklists and messages exchanged during discussions. The aim is to establish, for instance, whether documents promise operational freedom while menus and service standards are mandatory in practice.

You should also distinguish current arrangements from those you plan to introduce. Even if the relationship currently involves only product supply, the facts relevant to the assessment will change if future contracts bundle shared signage, compulsory training and regular inspections. Record the planned transition date alongside the proposed changes.

2. Link the five criteria to supporting evidence

A useful assessment table has four columns: ‘criterion’, ‘actual practice’, ‘supporting evidence’ and ‘follow-up questions’. Rather than simply ticking whether a criterion is met, record the reasons for your assessment.

• Use of business identifiers: Check whether the other business uses the franchisor’s trademark, trading name, signage or similar identifiers. These do not necessarily have to be registered trademarks. Look for names or signs that customers could recognise as a shared brand.
• Quality standards and operating methods: Check for common standards governing core business activities, such as product ranges, recipes and service procedures. Record whether these are recommendations or requirements, and what happens if they are not followed.
• Support, training and control: Describe how opening support, operational advice, regular training and quality inspections are provided. Actual visit records and operational instructions are important evidence, alongside the contract terms.
• Payment of franchise fees: Establish whether payments are made in return for the use of business identifiers, operational support or similar benefits. Look beyond the labels on invoices to the purpose of each payment and how it is calculated.
• An ongoing business relationship: Check whether the relationship ends after training or whether supply, support, inspections and payments continue. Review the contract term and renewal arrangements as well.

For example, the fact that a franchisor sends a shop an operating guide is not enough on its own to reach a conclusion. Its significance depends on whether it is a product manual available for anyone to consult or a set of mandatory operating standards. You must also establish whether the person responsible actually requires compliance.

Where evidence is missing, it is safer to mark an item ‘requires confirmation’ rather than ‘not applicable’. Early arrangements often involve verbal promises, so both parties should confirm whether the terms understood by the other business match those described by the prospective franchisor.

3. Test claims of ‘no franchise fee’ against the flow of money

‘No joining fee’ does not mean there are no franchise fees. Under the Franchise Act, franchise fees are not limited to sums expressly labelled as such in the contract. Check whether charges for the use of business identifiers, support or training are included in other costs.

Items to review may include know-how transfer fees, opening support charges, regular management fees, deposits and payments for goods. These do not all automatically qualify as franchise fees. You need to examine the statutory definitions, the actual purpose of the transaction, refund conditions and the structure of supply prices.

In particular, where goods are supplied, do not assume that ‘we only charge for products’ means the arrangement is not a franchise. Check whether the supply price includes a component that amounts to a franchise fee. Equally, avoid concluding that an arrangement is a franchise simply because an ordinary wholesale transaction generates a profit.

In practice, listing every payment made by the other business before and after signing, in chronological order, helps reduce omissions. For each payment, record the recipient, purpose, calculation method, whether it is refundable and any associated obligations. Include payments received by related companies, not just the franchisor, to help establish the overall structure.

The purpose of this exercise is not to redesign the charges, but to determine the legal nature of the existing arrangement. Do not just check cash payments: compare tax invoices, bank transfer records, supply contracts and training agreements to see whether their explanations are consistent.

4. Turn the assessment into rules for proceeding with contracts

Once the assessment table is complete, distinguish between the likelihood that the arrangement qualifies as a franchise, facts that remain uncertain and further legal obligations requiring review. If the position is unclear, give the collected documents to a qualified Korean franchise transaction specialist or lawyer for assessment. Showing the actual business and payment arrangements will support a more accurate review than simply asking whether a know-how transfer model is permissible.

If the arrangement qualifies as a franchise, you must separately check the obligations under the Franchise Act, including registration and provision of the disclosure document. As a general rule, you must not accept franchise fees or enter into a franchise agreement before providing the registered disclosure document and allowing the statutory consideration period to elapse. The usual period is 14 days. The Act also permits a shorter period where specified requirements relating to professional advice are met, so check the applicable conditions.

Nor should you assume that a small business is exempt from every obligation. There are provisions excluding certain small-scale arrangements from the Act’s scope, as well as exceptions to those exclusions. Whether an arrangement qualifies as a franchise and whether individual provisions apply therefore require separate consideration. The requirement to operate a company-owned outlet at the disclosure-document registration stage, and any exceptions to it, must also be checked separately.

Even a finding that the arrangement is not a franchise does not bring contract management to an end. Relevant legal issues remain, including contractual liability under civil and commercial law, authority to use trademarks and protection of trade secrets. Reassess the position if the operating practices on which the finding was based change.

Internally, appoint someone responsible for approving contracts and establish a review process for changes such as the introduction of shared business identifiers or regular management oversight. Keep the review date and supporting documents together so that future staff can understand the basis of earlier decisions.

Action summary: Before changing the contract title, prepare a one-page outline of the business arrangement. Set out the five criteria, actual payments and unresolved questions, then obtain a legal review before finalising the contract and payment collection procedures. This is the starting point for building a trusted franchise network.