Gyeonggi Province: "When Signing Franchise Agreements Through Startup Consulting, Review Documents Before Trusting Words"

The Gyeonggi Provincial Government has urged prospective franchisees to exercise caution before signing contracts, warning that inaccurate explanations during franchise agreements made through startup consulting can lead to financial damage.

Recently, a dispute mediation case was filed in Gyeonggi Province involving people who entered into franchise agreements through startup consultants (franchise recruitment agents) and claimed that they were not properly informed of key terms, such as the contract duration between the franchise headquarters and retailers (department stores and outlets). As a result, the affected franchisees had to close their businesses earlier than expected and suffered significant financial losses, unable to recover much of their initial investments.

In one case, a prospective franchisee trusted the startup consultant’s claim that there would be “no operational issues for seven to eight years” and paid a premium of 45 million won to acquire a directly managed store, only to be forced to close the business before the expected period. Another individual believed the consultant who said “operations can continue,” paid a total of 130 million won (including the premium) for an outlet franchise, but was notified of termination after just seven months.

The Gyeonggi Provincial Government pointed out that these damages stem from the distorted interests of some consultants. Despite their economic ties with franchise headquarters—receiving financial benefits when a franchise agreement is signed—these consultants often present themselves as neutral experts. As a result, prospective franchisees believe they are receiving objective advice and enter into contracts based on this misguided trust.

Additionally, some consultants demand that their commission be paid in advance before providing information about available stores, or pressure clients to act quickly by saying, “someone else is about to sign.” During this process, mandatory procedures such as providing franchise disclosure documents and contracts in advance, and granting a 14-day cooling-off period as required by the Fair Transactions in Franchise Business Act, are sometimes not observed.

Gyeonggi Provincial Government

Most notably, explanations regarding sales, profits, and contract duration are typically given only verbally. Therefore, even if there are false or exaggerated claims, it is difficult to prove them after the fact. In case of a dispute, the franchise headquarters may deny any relationship with the consultant or shift responsibility to the individual consultant, making it difficult for victims to obtain compensation.

In response, the Gyeonggi Provincial Government advised that when signing a franchise contract through a startup consultant, prospective franchisees should: ▲ ensure that the franchise disclosure document, franchise agreement, and status reports of nearby franchisees are provided at least 14 days in advance; ▲ confirm the consulting commission structure and the consultant’s relationship with the franchise headquarters; ▲ include verbal explanations as special provisions in the contract and keep supporting evidence; ▲ require written projections and calculation bases for expected sales; and ▲ thoroughly verify the feasible business duration and the possibility of recovering the premium, consulting with a franchise transaction specialist if necessary.

Bongja Seo, Director of Fair Economy at the Gyeonggi Provincial Government, emphasized, “Establishing a franchise business is an investment that can affect your livelihood, so meticulously checking objective materials such as franchise disclosure documents is the starting point for preventing damage.” She added, “If you have any questions before a contract or experience damage, please seek professional counseling through the Gyeonggi Province Fair Trade Support Center.”

The Gyeonggi Provincial Government operates the Fair Trade Support Center, which offers consultation and dispute mediation for small business owners facing difficulties in all fields related to fair trade, including, but not limited to, franchise transaction disputes, agency contracts, subcontracting, large-scale retail, and general unfair practices.

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