Planning Contract Renewals Before Franchising: From the First Agreement to Beyond Expiry

When converting an existing business into a franchise network, attention tends to focus on the first agreement and opening the first franchised outlet. Yet without clear terms for continuing the relationship after the agreement expires, disputes can arise just as an outlet becomes established. To sustain a franchise network, renewal should be designed not simply as another signing exercise, but as a process that protects franchisees’ rights while preparing for the next operating term. Prepare the agreement, timetable and review checklist together before recruiting your first franchisee.

1. Distinguish the contract term from the statutory right to request renewal

Franchising in South Korea is governed by the Fair Transactions in Franchise Business Act. Article 11 requires the franchise agreement to state its term, while Article 13 sets out rules on renewal requests and refusals. Specifying an expiry date does not mean the franchisor can end the relationship on that date solely at its own discretion.

If a franchisee requests renewal between 180 and 90 days before the agreement expires, the franchisor cannot refuse without justifiable grounds. This right can be exercised within a total franchise contract period of no more than 10 years, including the initial term. That is not the same as saying every franchise agreement is guaranteed to last 10 years from the outset.

Nor does the agreement automatically end once 10 years have passed. Renewal beyond that point requires consideration of the contract terms, the parties’ agreement and the specific history of the business relationship. Rather than adopting an internal rule that all agreements end at the 10-year mark, it is safer to flag these cases for separate review.

When drafting your first agreement, set out the following items separately:

• The start and end dates of the initial agreement, and the term of any renewed agreement
• Where franchisees should submit renewal requests and how receipt will be acknowledged
• The evidence to be used in renewal reviews and the person responsible for reviewing it
• How proposed renewal terms, disagreements and the final agreement will be recorded

The contract term also affects a franchisee’s investment decision. However, explaining the expected investment payback period is different from guaranteeing that the agreement will remain in force. Check your sales explanations alongside the contract so that prospective franchisees are not told they can ‘keep operating for as long as they wish’ when the agreement says otherwise.

2. Manage renewals around statutory timeframes, not just expiry dates

Waiting until a franchisee requests renewal can leave too little time to check records and make decisions. Franchisors should register the expiry date as soon as an agreement is signed and schedule an internal review before the statutory renewal request window opens. This is a practical preparation measure, not an additional statutory deadline.

Your contract register should record the outlet name, contracting parties, initial contract date, current contract term, cumulative contract period and date any renewal request is received. Link any documents relating to contract amendments or transfers of operating rights. In particular, if the contracting party changes, do not simply reset the cumulative period: obtain a legal review of whether the existing agreement has been taken over.

If a franchisor refuses a renewal request, it must notify the franchisee in writing, stating the reasons, within 15 days of receiving the request. The receipt date is therefore more than a customer contact record: it determines the statutory response deadline. Appoint a deputy so that requests are not missed when the usual contact is on leave or leaves the business.

The Act also provides for an agreement to be deemed renewed on the same terms if the franchisor fails to give the prescribed notice, subject to exceptions. Delays in internal approval or a loss of contact should not automatically be treated as ending the agreement. Check statutory timeframes and notice requirements separately from the timetable set out in your contract.

For example, if a franchisee tells a field support representative that they wish to renew, it is advisable not to disregard this merely because the franchisor’s official form was not used. The representative should record what was said and when, then immediately pass the information to the person responsible for contract management. Administrative convenience must not take precedence over a franchisee’s exercise of their rights.

3. Base renewal reviews on facts and grounds, not scores

A renewal review checklist should not be a tool for screening out franchisees the franchisor dislikes. Its purpose should be to establish whether there are legally permissible grounds for a decision and to identify the steps needed for the outlet to operate reliably during the next contract term.

The Franchise Business Act specifies grounds relevant to refusing renewal, including failure to pay franchise fees or other sums due, refusal to accept contract terms or operating policies normally applied to other franchisees, and failure to comply with important operating policies. However, statutory requirements define the scope of those important policies. Not every instruction in the franchisor’s manual automatically provides grounds for refusal.

Separate your review into three levels:

• Established facts: Objective evidence, such as records of unpaid amounts, inspection findings and training attendance
• The franchisee’s explanation: Disagreements over whether payment was made, premises or equipment issues, reasons for missing training, and similar matters
• Legal assessment: A review of whether the facts actually constitute grounds for refusing renewal

Avoid criteria that allow renewal to be refused solely because sales are low or the franchisee has challenged the franchisor. Poor sales may reflect the local market or shortcomings in the franchisor’s support. A low overall review score does not, by itself, establish legally justifiable grounds for refusal.

If quality issues are identified, retain records of when they arose, how they were verified, what the franchisee was told and the outcome of remedial action. It is more reasonable to explain problems and check improvements during routine support than to present a bundle of old complaints just before renewal. These records can support a decision to continue the relationship as well as a decision to refuse renewal.

4. Separate changes to renewal terms from the signing process

Renewal often brings together proposed changes to royalties, training, equipment and operating methods. Franchisors should distinguish between approving renewal and reaching agreement on new terms. If there is insufficient justification or explanation for applying new terms to an existing outlet, obtaining a signature on a renewal agreement will not, on its own, resolve the issue.

When preparing proposed changes, set out the existing terms, proposed terms, reasons for the changes, costs or obligations for the franchisee, and intended implementation date side by side. Where costs arise, state whether they are one-off or recurring. Matters subject to separate legal requirements, such as outlet refurbishment or mandatory purchase items, should be reviewed individually rather than bundled together under the heading of renewal.

If you plan to charge a renewal fee, first establish what services will actually be provided and the basis for charging it, rather than starting with a label for the fee. Cross-check the existing agreement and disclosure document. A charge first raised shortly before expiry may be perceived by the franchisee as an additional payment they effectively have to make to stay in business.

Contract templates should also take account of South Korea’s Act on the Regulation of Terms and Conditions. Rather than using blanket wording such as ‘renewal is conditional on unconditional acceptance of the franchisor’s terms’, establish a process that specifies the changes and gives franchisees an opportunity to review them. Also check which document provision obligations apply to the particular renewal arrangement.

Finally, run a mock renewal using a realistic expiry date. Test scenarios in which the person receiving requests is absent, the franchisee disputes a charge, or the review evidence is incomplete. You should be able to explain who makes the decision and what records are retained at each stage. That clarity is essential to providing continuing support beyond the initial agreement.

Action summary: Before recruiting your first franchisee, prepare renewal clauses, an expiry-date register, a fact-based review checklist and a comparison table for proposed changes to terms. The key is to make renewal a process for confirming statutory rights and mutual commitments, rather than a permission granted unilaterally by the franchisor.