[BizHanKook] Companies sometimes make decisions that are difficult to explain based solely on money. Understanding the laws or systems hidden within them can help reveal the deeper context. ‘Useful Business Laws’ introduces key concepts to help understand the flow of business..
To what extent can the state intervene in a franchise business? To start with the conclusion, it can hardly intervene in the actual substance of the business. However, it can intervene as much as it wants in what a company ‘says’ about its business. Our Constitution makes respect for the economic freedom and creativity of individuals and companies the foundation of our economic order (Article 119, Paragraph 1 of the Constitution).
What menu a franchisor sells, how it expands its stores, and what additional services it attaches are, in principle, matters for the company to decide. Unless it violates the law, the state has no grounds to say, “That business model is wrong.” More fundamentally, the state lacks the ability to judge what is appropriate for market conditions or what is economically rational. That judgment belongs to the market.
However, there are moments when regulatory authorities feel that “this needs to be addressed.” The first tool authorities reach for in those instances is the regulation against the provision of false, exaggerated, or deceptive information. While it is difficult to judge the viability of a business, it is relatively easy to determine whether what a company said differs from the truth or if it concealed important facts.
Advertising is inherently about highlighting strengths and downplaying weaknesses. A certain degree of exaggeration and omission is a characteristic of advertising. The problem arises with new businesses, businesses that combine multiple fields, or businesses that are already controversial. In these types of businesses, issues almost invariably arise during the information disclosure process.
Let’s say a franchise business incorporates a real estate development business. The franchisor acts as an intermediary for landlords and construction companies, and even provides market and commercial area analysis services. The idea itself is not bad. The problem is the language used. Expressions like ‘expected rate of return,’ ‘stable rental income,’ and ‘premium’ are used routinely in real estate development advertisements.
However, the moment the same expressions are delivered to a prospective franchisee, the standards of the Franchise Business Act are applied. The Franchise Business Act prohibits the provision of information that exaggerates expected profit situations without objective evidence and requires that expected sales figures be calculated according to the methods and grounds stipulated by law. This is why using the language of real estate developers as-is becomes a point of contention regarding compliance with the Franchise Business Act.
Added to this is the unique nature of franchising. Franchising is a sector with high public interest and media attention. When a controversy arises, it is inevitably reported in the press, and if reports continue, the Fair Trade Commission (FTC) gains a justification for intervention.
A representative example of this is the case of Company M, which was sanctioned by the FTC last September. Company M, a franchisor operating an "all-you-can-eat" pork rib brand, combined finance with its franchise business. It simply combined loans instead of real estate development, but the structure was not much different from the previous example.
From 2018, Company M provided startup funds to franchisees interest-free, but switched to an interest-bearing method at the end of 2021. In this process, the chairman’s family established 14 lending companies where they held stakes, and Company M lent funds to these firms at a low rate of 2.3–4.6% per annum. The lending firms then lent this money to prospective and existing franchisees at 12–18% per annum. Loan consultations and contract procedures were handled by Company M staff, and the principal and interest were recovered through a so-called ‘product-based repayment’ method, where franchisees paid an additional amount per box when purchasing essential meat supplies. There were also provisions for subrogation, where Company M would repay the debt if the store owner failed to do so, and the establishment of mortgage rights with Company M as the creditor.
The controversy over “making money off interest from franchisees” grew due to National Assembly materials and media reports in the second half of 2025, and in September 2026, the FTC issued two types of sanctions. One was for unfair support activities under the Fair Trade Act, resulting in a corrective order, a fine of approximately 10.47 billion won, and the filing of criminal charges against the corporation and the chairman. The other was the subject of this article: violations of the Franchise Business Act.
The FTC’s reasoning is simple. First, it is the provision of false information. Company M wrote “Not Applicable” in the ‘Credit Provision and Intermediation Details’ section of its information disclosure document. It did so even though it was providing and arranging startup funds through specially related lending firms. The enforcement decree of the Franchise Business Act requires franchisors to state the specific conditions and amounts in the information disclosure document if they directly provide or arrange credit.
Second, it is the provision of deceptive information. Company M did not inform prospective franchisees that the lending firms were its specially related companies, the specific conditions such as loan interest rates, that the franchise agreement and the loan agreement were linked, or the structure of repaying the principal and interest on top of meat supply payments. The FTC determined that if prospective franchisees had known these facts, their judgment regarding whether to sign the contract or their methods of financing could have been different, thus concluding that the company concealed facts that had a significant impact on the conclusion and maintenance of the contract. The result was a prohibition order, a notification order, and a fine. It is known that Company M has expressed an intention to appeal, so the final conclusion remains to be seen.
A notable point is that the FTC did not prohibit the business model of “a franchisor arranging startup loans” itself. It did not set a specific interest rate either. What the FTC took issue with was the fact that the company did not accurately describe the structure. It is rare to find a case that illustrates as well as this one that even if the state cannot touch the content of a business, it can wield a sword against its ‘words.’
In the realm of the Franchise Business Act, the most representative type of false or exaggerated information provision is by far the estimated sales figures. There are many cases. In June 2024, a dessert brand franchisor stated in its estimated sales calculation document that it had used the methods prescribed by law, but in reality, it was sanctioned for calculating figures arbitrarily, such as including franchisees from other metropolitan governments that were not part of the planned store location.
In July 2025, a pork belly brand franchisor presented the same estimated sales range for a store in Gangnam, Seoul, and a store in Chuncheon, Gangwon. It used the national average sales of its franchisees as the estimated sales figure. The FTC viewed both cases as the provision of false and exaggerated information. It is not just a matter of numbers, either. In a pig’s trotters (jokbal) brand case announced in early June of this year, the company was sanctioned for violating the Fair Labeling and Advertising Act by advertising that a store that was the only one open during the period was one of “16 stores opened in May–June,” and was separately sanctioned for deceptive information provision for under-reporting profits received from suppliers in its information disclosure document.
What is even heavier is civil liability. In the Supreme Court case 2021Da300791, decided on May 26, 2022, the franchisor arbitrarily excluded some of the lowest-performing stores among the 5 nearest franchisees from the planned location and included other franchisees to inflate the minimum end of the estimated sales range. The lower court recognized only the franchise opening costs as damages and dismissed the claim for operating losses, citing them as special damages dependent on the franchisee’s operating ability or market conditions.
The Supreme Court’s judgment was different. It held that the franchisor bears a duty of care to calculate the expected profit situation based on objective and accurate grounds, and that operating losses suffered by a franchisee who signed a contract relying on inflated estimated sales constitute ordinary damages with a substantial causal relationship. It also stated that even if it is difficult to prove the exact amount due to other mixed factors, the court can recognize a reasonable amount of damages. This means that the cost of miswriting a single number can return as losses accumulated throughout the store’s entire operating period. Moreover, the current Franchise Business Act also includes a provision that allows for damages of up to three times the actual loss if someone suffers damage due to false, exaggerated, or deceptive information.
The reason the regulations against false, exaggerated, and deceptive information under the Franchise Business Act are fearsome is that their scope of application is broad. It is not just about the information disclosure document. Practically, four things need to be checked. First, it does not distinguish between formal and informal. Everything from the information disclosure document and estimated sales calculation document to startup presentation materials, website/blog advertisements, and even counseling remarks or messages from development staff can be considered “information provision.”
Second, it does not distinguish between before and after the signing of the contract. The law regulates the provision of information not only to prospective franchisees but also to already contracted franchisees, and prohibits the concealment of facts that have a significant impact on not only the conclusion but also the ‘maintenance’ of the contract. Explanations during renewal proposals, the introduction of new menu items, and renewal negotiations are no exceptions.
Third, combined businesses must first undergo ‘language translation.’ Do not use the language of other industries like finance, real estate, or platforms as-is; filter it through the standards of the Franchise Business Act. If a transaction involves a specially related company, the principle is to disclose that relationship first.
Fourth, be suspicious of “Not Applicable.” Blank spaces or “Not Applicable” in the information disclosure document are areas prone to false entries. Whenever the business structure changes, the items must be cross-checked again.
The state will not tell you which business is right. However, it will ask to the end whether what the company said is true. A franchisor planning a new business should design how to explain that business before refining the business model itself. The blade of regulation always starts not with the business, but with the words.