Prospective franchisees to get more disclosure data before signing, including closure penalties

Prospective franchisees will soon be able to check the average penalty for early contract termination and a brand's long-term survival rate before signing on the dotted line. A franchisor's overseas expansion status will also be newly disclosed, and the number of franchise and company-owned outlets will be updated quarterly rather than once a year.

The Korea Fair Trade Commission said Tuesday that the Cabinet approved an amendment to the enforcement decree of the Act on Fair Transactions in Franchise Business.

The amendment focuses on expanding the information available to prospective franchisees when choosing a brand, and on providing more complete data on average early-termination penalties when a contract is dissolved mid-term.

The disclosure document's list of required items will be comprehensively overhauled. Newly added items include information on franchisors owned by private equity funds, the long-term survival rate of franchise outlets, a franchisor's overseas expansion status, franchisee payment information, and the average penalty for early contract termination.

Items deemed redundant or of limited relevance to startup decisions — including a franchisor's merger and acquisition history, franchise fee escrow procedures, and the basis for calculating the annual average sales of company-owned outlets — will be removed.

The update cycle for key brand-selection data, such as the number of franchise and company-owned outlets, will be shortened from once a year to once a quarter. The aim is to narrow the information gap between franchisors and prospective franchisees by quickly refreshing items that change relatively often and are easy to compile.

The structure of the disclosure document will also be reorganized around the user. The existing table of contents will be restructured to follow the lifecycle of a franchise outlet — opening, operation and closure — to improve readability. A new summary section will be introduced to present key data relevant to startup decisions, such as the number of outlets by region and average annual sales.

The forms and procedures for registering new or amended disclosure documents will also be streamlined. Going forward, franchisors will be required to submit supporting documents proving they operate company-owned outlets when filing a new registration.

Under the current "1+1 regime," a franchisor must have operated at least one company-owned outlet for at least one year before registering a new disclosure document. Making the submission of supporting documents mandatory will allow regulators to verify that this requirement has been met at the registration stage.

In addition, the enforcement decree will establish a legal basis for registration authorities to use electronic documents when notifying franchisors of registration rejections, pending disclosures and registration cancellations. The change is intended to resolve review delays caused by the existing requirement to send notifications by registered mail.

The procedure for franchisors to voluntarily apply for cancellation of their disclosure document registration — for example, when closing their business — will also be formalized. The decree will set out the processing procedures, including online applications, and the administrative basis for managing such requests, along with new standard forms. The Fair Trade Commission plans to revamp its franchise information system in tandem with the amended decree's implementation.

The ceiling on surcharge adjustments for franchisors that repeatedly violate the law will also be raised. A separate amendment to the surcharge imposition guidelines under the Franchise Business Act, to be promulgated together on Aug. 4, will increase the cap on the commission's surcharge adjustment authority from 50 percent to 100 percent.

The Fair Trade Commission said it expects the amendment to help prospective franchisees make more informed startup decisions and to improve transparency and trust in franchise transactions.

The amended enforcement decree will take effect on Jan. 1, 2028, alongside an amendment to the public notice on standard disclosure document formats, which will also be promulgated on Aug. 4. Amendments unrelated to the restructuring of the disclosure document system will take effect immediately upon promulgation on Aug. 4.