Seoul City to Impose Fines on Headquarters for Not Providing 'Estimated Sales Statement' in Franchise Contracts Starting Next Year

Penalty Imposed for Failure to Provide Estimated Sales Statement and Advertising·Promotion Expense Details

[Asia Economy Reporter Kiho Sung] The Seoul Metropolitan Government announced on the 26th that starting next year, franchise headquarters will be fined if they fail to provide franchisees with an ‘Estimated Sales Calculation Statement’ and a ‘Details of Advertising and Promotion Expenses (borne by franchisees).’

This authority was transferred to local governments following the amendment of the Franchise Business Act in May, which was previously promoted by the Fair Trade Commission. The city explained that after a guidance period this year, fines of up to 10 million KRW will be imposed from next year depending on the number of violations.

According to the Franchise Business Act, large franchise headquarters with 100 or more franchise stores must provide franchisees with a written ‘Estimated Sales Calculation Statement’ at the time of signing the franchise contract. Additionally, all headquarters, regardless of the number of franchise stores, must provide franchisees with detailed statements of advertising and promotion expenses borne by the franchisees.

Prior to this, to ensure smooth implementation of the system and to understand the operational status of franchise stores, the city conducted a ‘Franchise Business Operation Status Survey’ from October to November targeting 460 franchise stores belonging to 25 large franchise headquarters (operating more than 300 stores) registered in the city.

The survey results showed that 35.4% (163 franchisees) did not receive the ‘Estimated Sales Calculation Statement’ from the headquarters at the time of contract. Furthermore, half of the franchise stores (49.1%) did not meet the initially projected sales figures provided by the franchise headquarters, indicating the need to verify the accuracy of the information provided by the headquarters, the city added.

Moreover, although franchise headquarters are legally obligated to notify franchisees of detailed execution records of advertising and promotional expenses borne by the franchisees, only 38.5% of franchisees responded that they had received such notifications.

The city stated that the practice of not notifying the estimated sales calculation statements and advertising expense execution details still persists. For suspected legal violations found in this survey, the city has sent guidance letters to the respective franchise headquarters and urged compliance with legal obligations.

Additionally, next year, the city plans to thoroughly inspect the operational status of franchise headquarters by industry to prevent damages to franchisees and will actively provide counseling and legal remedies to franchisees. The city also intends to expand promotional activities to raise accurate awareness of the Franchise Business Act among both franchise headquarters and franchisees.

Currently, to create a fair franchise market, Seoul is conducting various support projects including operating the ‘Franchise and Distribution Transaction Counseling Center’ that provides relief for unfair damages in franchise and agency transactions, and education for (prospective) franchisees, in addition to operational status surveys.

The ‘Franchise and Distribution Transaction Counseling Center’ serves as a legal guardian for small business owners and franchisees harmed by unfair transactions from headquarters. Currently, 41 legal counselors (17 lawyers, 20 franchise transaction specialists, 2 labor attorneys, and 2 tax accountants) provide legal consultations, publicity, and preventive education related to unfair trade practices.

Furthermore, close-contact education is provided to help franchisees protect their rights and respond to unreasonable treatment by headquarters by offering information on franchise-related laws and systems, disclosure document analysis, and precautions when signing franchise contracts.

Ryu Dae-chang, Director of Fair Economy at Seoul City, said, “We will create a franchise market where franchise headquarters and franchisees coexist by implementing measures and projects that prevent damages to franchisees and prospective entrepreneurs while protecting their rights.”

This content was produced with the assistance of AI translation services.