"Is a Private Equity Fund the Owner?" Fair Trade Commission Announces Legislative Notice of Franchise Business Act Enforcement Decree to Prevent 'Blind Startups'

Mandatory Disclosure of Franchisee Survival Rates and Penalty Information
Comprehensive Overhaul of Disclosure Statements Centered on the Franchisee Lifecycle
Transparency in PEF-Owned Headquarters' Ownership Stakes and Loan Terms
Disclosure of Delivery App and Mobile Gift Certificate Partnership Details
Implementation Scheduled for the First Half of the Year Following Completion of Amendments

Going forward, prospective franchise owners will be able to easily check how long a particular brand tends to survive and what the penalties are for early contract termination. In particular, information about franchise headquarters owned by private equity funds (PEFs), which has been a source of recent controversy, will be transparently disclosed, reducing the risk of damages from "blind startups."

The amendment to the Enforcement Decree of the Franchise Business Act and the Standard Form of the Information Disclosure Statement, which prevents "blind entrepreneurship," has been announced for legislative notice. The photo shows the 82nd Franchise Startup Expo held at COEX in Gangnam-gu on the 15th. Photo by Yonhap News.

On January 28, the Fair Trade Commission announced that it has issued a legislative and administrative notice for amendments to the Enforcement Decree of the Franchise Business Act and the Standard Form of the Information Disclosure Statement. The core of these amendments is to strengthen the "risk indicators" that prospective franchisees must be aware of before starting a business. In response to criticism that the previous disclosure statements were too extensive and complex-often causing essential information to be overlooked-the table of contents will now be reorganized in line with the franchise lifecycle (establishment-operation-termination), and key information will be summarized for easier access.

A notable change is the introduction of "stability indicators." Franchise headquarters will now be required to disclose the franchisee survival rate, the number of recent franchise closures and their average operating period, and the average penalty for early contract termination. The aim is to allow prospective franchisees to see how long actual franchise locations are sustaining themselves, rather than relying on the headquarters' promotional language.

Information disclosure regarding franchise headquarters owned by private equity funds (PEFs), which has recently been identified as a source of conflict in the franchise industry, will also be made more specific. Headquarters must specify whether a private equity fund is the largest shareholder, as well as its name and ownership percentage. If the headquarters provides credit loans to franchisees, the terms and interest rates must also be detailed. In addition, the specifics of partnership contracts that impose significant costs on franchisees-such as delivery apps or mobile gift certificates-will now be subject to disclosure. Conversely, items with low practical value, such as information on executives unrelated to the franchise business or simple contract modification procedures, will be removed to enhance the effectiveness of the information provided.

Furthermore, the update frequency for information that significantly influences startup decisions-such as the number of franchise locations, average operating period, and penalty amounts-will be shortened from the current one year to every three months (quarterly), in order to reflect market changes more rapidly. The Fair Trade Commission plans to finalize the amendments to the Enforcement Decree and the Standard Form after gathering feedback from stakeholders during the legislative and administrative notice period and completing a review by the Ministry of Government Legislation, with implementation scheduled for the first half of this year.

The Fair Trade Commission stated, "Through these amendments, prospective franchisees will be able to make more careful and rational decisions about starting a business based on comprehensive information. We expect this to help reduce information asymmetry between franchisees and headquarters at the startup stage and support rational decision-making by prospective franchisees."

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