Reviewing Your Business Model Before Franchising: Can a Trade Mark Licence Count as a Franchise?

Once an existing outlet is running reliably, you may consider expanding by allowing other businesses to use your brand and operating methods. Describing them as ‘partner outlets rather than formal franchisees’ does not determine the legal status of the arrangement. The starting point for building a franchise network is to examine how the business relationship actually works, not what the contract is called. Before making commitments to your first external operator, review trade mark use, operating standards, support and the flow of payments together.

1. Look at the Actual Business Relationship Before the Contract’s Name

South Korea regulates franchise relationships under the Fair Transactions in Franchise Business Act. Article 2(1) defines a franchise business as a continuing business relationship combining the use of business identifiers, specified quality standards or operating methods, support, training and control over management and business activities, and payment of franchise fees in return. You should therefore not decide whether the Act applies simply by checking whether the contract contains the word ‘franchise’.

For example, imagine another business using the same signage as your original outlet, following prescribed recipes and service standards, and receiving training and inspections from you. If it also pays for the use of the brand and operational support, you should not proceed on the assumption that calling the document a ‘brand partnership agreement’ settles the matter. Conversely, permission to use a trade mark does not automatically make every arrangement a franchise. You need to examine how the various elements work together in practice.

As part of your review, write down your understanding of the arrangement and the other party’s understanding separately, then compare them. You may see it as a straightforward transfer of know-how, while the other party expects ongoing training and outlet management. Collect proposals, messages exchanged during discussions and fee information provided outside the contract to help identify these differences.

Your initial checklist could include the following questions:

• Which trading names, signs and packaging designs may the other party use?
• Which operating standards do you require them to follow?
• Will training, advice and inspections continue after opening?
• What is each payment made by the other party actually for?
• Are these rights and obligations one-off, or do they form a continuing relationship?

This is a tool for organising the facts for professional review, not a statutory test. Do not assume that removing one feature or changing the wording will determine the legal outcome.

2. Map the Brand, Operations and Payments on One Page

Start by setting out the scope of permitted brand use. Check which names will appear not only on signage, but also on delivery ordering screens, online listings, uniforms and packaging. The permission you grant should match what customers will actually see. If you describe the arrangement as ‘just licensing the trade mark’ but require the outlet to operate as though it were identical to your own, record the reasons and the specific obligations involved.

Next, list your involvement in operations. Include everything you will do, such as providing recipes, pre-opening training, regular visits, menu approval, pricing guidance and handling customer complaints. For each item, specify whether it is mandatory or recommended, who is responsible for carrying it out, and what happens if it is not followed. It is important to capture not only the powers written into the documents, but also those you intend to exercise in practice.

For payments, distinguish between their labels and their substance. Having no joining fee or recurring royalty does not automatically mean the arrangement is not a franchise. For every payment—including training fees, licence fees, deposits and payments for goods—record who receives it, when it is paid, how it is calculated and what is provided in return. Whether each amount qualifies as a franchise fee under the Act requires a separate assessment of its nature.

For example, you should be able to explain whether a monthly ‘management fee’ merely covers access to a shared system or pays for brand use and continuing operational support. Likewise, do not assume that all payments for goods are franchise fees, or exclude them from review simply because they are labelled as payments for goods. If quotations and contracts do not make their purpose clear, it is safer to check the services actually provided alongside the relevant payment and reconciliation records.

3. Clarify the Boundaries of Trial Operations and Know-How Transfer

An outlet opened and operated at an external business owner’s expense is sometimes described as a ‘trial outlet’. However, that label does not itself provide an exemption from franchise regulation. Start by distinguishing between an outlet you operate directly and one run by a separate business at its own risk. Useful evidence includes who holds the lease, employs staff, receives sales revenue and bears any losses.

The same principle applies to know-how transfer. An arrangement in which the recipient completes training and then operates independently under its own brand and methods should be distinguished from one in which it continues to follow standards under a shared brand. Do not simply count the training sessions: check which rights and obligations remain afterwards. Even advice described as free may need to be examined for links to other payments.

In practice, it can help to prepare a separate explanatory document for each type of arrangement. Include the brands that may be used, the know-how to be transferred, whether support will continue, the standards to be followed, costs, and what may still be used after the agreement ends. What you present to the other party should match your internal operating plans. Align sales scripts as well, so that sales staff do not promise more support than the contract provides.

An arrangement may begin as an independent transfer of know-how, with shared branding and regular oversight added later. Such changes may be more than an expansion of services: they can trigger a need to reassess the legal nature of the relationship. Before agreeing to a change, review the existing contract, additional charges and new control requirements together.

4. Link the Legal Assessment to Practical Steps Before Recruitment

Give the materials you have assembled to a qualified franchise transaction adviser in South Korea or a lawyer with relevant experience. Ask more specific questions than ‘Is this contract all right?’ It is better to establish separately whether the current arrangement constitutes a franchise, how the Act applies and what exceptions may be relevant, and which procedures are required before recruitment, signing or receiving money. Keep the materials used for the review, along with a record of any subsequent changes to the terms.

If the arrangement constitutes a franchise, check which obligations apply and prepare an implementation plan. These may include registering and providing a franchise disclosure document, supplying the contract in advance, and placing franchise fees in escrow. Registering the disclosure document and providing it to the prospective franchisee are separate steps. You must not skip required procedures simply because a contract has been drafted or the other party wants to proceed quickly. Check the applicable waiting periods and whether payments must be placed in escrow separately.

Even if the review concludes that the arrangement is not a franchise, this does not mean there are no legal obligations. Depending on the transaction, South Korea’s Civil Act, Commercial Act, Trademark Act and Act on the Regulation of Terms and Conditions may still be relevant. Brand-use rights, payment obligations and the scope of liability must remain clear. You should also check that actual operations continue to match the arrangement assessed in the review.

Practical takeaway: Before recruiting your first partner outlet, summarise brand use, operational involvement and payment flows on a single page. Establish the legal nature of that arrangement, then design the contract and procedures around it. This is the first step towards building a sound franchise network.