Hello, this is Attorney Sangyun Eom of Cheongchul Law Firm.

For anyone considering a franchise agreement, projected sales and profit margins are key information in deciding whether to start the business. Because opening a store requires a substantial investment and often a lease agreement as well, the figures and explanations presented by the franchisor heavily influence the assessment of the business's profitability. Yet when actual sales after opening fall short of projections, disputes easily arise over whether the franchisor's explanation was inaccurate or whether the shortfall stems from changes in the business environment or problems in store operation.

To narrow this information gap, the Franchise Business Act prohibits providing false or exaggerated information and deceptive information, and imposes obligations to provide profit information in writing and to maintain the data supporting it. The key to determining illegality is whether there was an objective and reasonable basis at the time the information was provided, and whether that basis and its underlying assumptions were accurately explained. Below, we review the relevant legal standards and leading cases, and summarize what franchisors and franchisees should keep in mind during the transaction.

Distinguishing False or Exaggerated Information from Deceptive Information

Article 9(1) of the Fair Transactions in Franchise Business Act (the "Franchise Business Act") (가맹사업거래의 공정화에 관한 법률 제9조 제1항) divides prohibited information-provision conduct into two categories. Item 1, "providing false or exaggerated information," means providing information that differs from the facts or inflates them. Item 2, "providing deceptive information," means providing information in a way that conceals or understates facts that have a material impact on the conclusion or maintenance of the contract.

Article 8(1) of the Enforcement Decree of the Franchise Business Act (가맹사업법 시행령 제8조 제1항) lists types of false or exaggerated information, such as exaggerating expected profits without objective grounds, explaining as if minimum profits were guaranteed contrary to the facts, and providing unverified information in connection with trade-area analysis. Representing that intellectual property rights have been acquired when they have not is also included. Accordingly, not only the accuracy of profit figures but also explanations about the location and business foundation are subject to review.

Deceptive information provision may not reveal a problem on the face of what was explained. Article 8(2) of the Enforcement Decree (가맹사업법 시행령 제8조 제2항) prohibits, among other things, explaining that money, goods, or services are provided in all cases without disclosing that certain requirements must be met to receive such support. Therefore, when describing subsidies or business-support benefits, the franchisor must clearly convey not only the amount and content but also the applicable conditions and limitations.

Explaining Expected Profits Requires Written Documents and Supporting Data

To ensure the accuracy of profit information, its content must be verifiable. Article 9(3) of the Franchise Business Act (가맹사업법 제9조 제3항) therefore requires that information on profitability, such as projected sales, gross profit, and net profit, be provided to prospective franchisees or franchisees in writing. Further, under paragraph (4) of the same Article (같은 조 제4항), the franchisor must keep the supporting data at its office and comply with requests to inspect it during business hours.

The supporting data goes beyond a simple calculation result and includes the factual materials used for the projection, the number of comparison stores, their proportion of all stores, and their distance from the proposed store site. The number and proportion of franchisees who actually achieved the stated profit level must also be verifiable. This material allows the prospective franchisee to judge how representative the presented figures are and to what extent they apply to their own store (Article 9(1) of the Enforcement Decree, 시행령 제9조 제1항).

Franchisors above a certain size bear additional obligations. A franchisor that is not a small or medium enterprise, or that had 100 or more franchisees under contract as of the end of the preceding business year, must provide a "projected sales statement" stating the range of projected sales and its supporting basis when the contract is concluded. Where the franchisor holds multiple brands, the threshold is determined by the franchisees using the same brand, and the statement must be kept for five years from the date of contract (Article 9(5) and (6) of the Act and Article 9(5) of the Enforcement Decree, 법 제9조 제5항, 제6항, 시행령 제9조 제5항).

These two obligations must be understood separately. Even a franchisor that does not meet the size threshold for a mandatory projected sales statement is still subject to the written-provision and supporting-data retention and inspection obligations whenever it provides profit information. A sales representative explaining profits only orally during consultations may constitute a violation of the Franchise Business Act.

Projected sales are a forecast of future business performance, so they may differ from actual results. The mere fact that actual sales are low therefore does not in itself establish false or exaggerated information provision. Conversely, liability is not excluded simply because the words "projected" or "estimated" were used. What must be examined is the objectivity of the data at the time of provision, the reasonableness of the forecasting method, and the accuracy of the explanation. In practice, the objectivity of a projection may be called into question when only a few high-performing stores are selected and presented as the typical performance of all franchisees, or when the results of stores in a different trade area or of a different size are applied without explanation. When net profit or profit margins are presented, sales and profit must be clearly distinguished, and it must be disclosed which costs, such as rent, labor, and raw materials, were reflected.

Meanwhile, where a franchisor favorably selects comparison stores to raise projected sales, this may be found to constitute false or exaggerated information provision. In a case where a franchisor excluded some low-sales stores and included others to raise the minimum figure of its projected sales, the Supreme Court held that "a franchisor owes a duty of care to calculate expected profits on objective and accurate grounds, and if it caused a franchise agreement to be concluded on the basis of incorrect information, it is liable to compensate for the resulting damage" (Supreme Court Decision 2021Da300791, May 26, 2022; 대법원 2022. 5. 26. 선고 2021다300791 판결).

A prospective franchisee may compare the minimum figure with expected expenses and conclude that at least an operating loss will not occur. Sample selection that raises the minimum figure can therefore distort the assessment of the business's stability. Accordingly, franchisors must verify not only that maximum sales are not exaggerated but also that the minimum figure, which affects the break-even assessment, is appropriate.

Franchise Fee Refunds and Damages: Requirements and Scope

Where false, exaggerated, or deceptive information provision is at issue, a franchise fee refund and a damages claim may be considered alongside a report to the Korea Fair Trade Commission or dispute mediation. However, each procedure and claim has a different purpose and different requirements, so a violation of the Act alone does not mean that every amount spent will be refunded or compensated.

Article 10(1)(ii) of the Franchise Business Act (가맹사업법 제10조 제1항 제2호) sets out, as a ground for refund, the case where the franchisor violates Article 9(1) and the prospective franchisee demands a refund of the franchise fee before the contract is concluded. After the contract is concluded, under item (iii) of the same paragraph, it must be recognized that the false or exaggerated information or the omission of material matters had a significant impact on the conclusion of the contract, and the franchisee must demand the refund within four months from the date of contract. The demand must be made in writing stating the matters prescribed by the Enforcement Decree, and the franchisor's refund deadline is one month from the date of demand.

In determining the scope of the refund, one first examines whether the money paid constitutes a franchise fee under the Act, and then examines what portion of that amount must actually be refunded. Article 10(2) of the Franchise Business Act (가맹사업법 제10조 제2항) requires consideration of the circumstances of contract conclusion, the nature of the consideration paid, the contract and performance periods, and the degree of fault of the parties. It is therefore necessary to break down the franchise fee, training fee, payment for goods, and other items, and to confirm the training, goods, and services actually received.

Meanwhile, Article 37-2 of the Franchise Business Act (가맹사업법 제37조의2) provides for liability where a violation of the Act causes damage to a franchisee, and for violations of Article 9(1) it recognizes liability of up to three times the damage incurred. An exception applies where the franchisor proves that it acted without intent or negligence. Nor is the award automatically set at three times; the court considers the scale of harm, the duration and frequency of the violation, the economic benefit to the franchisor, and its efforts to remedy the harm.

Supreme Court Decision 2021Da300791 discussed above also addressed whether operating losses are recoverable. The Court held that operating losses resulting from expenses such as rent that could not be covered by actual sales fall within the damage proximately caused by the false or exaggerated information provision, and reversed and remanded the part of the lower court's judgment that had rejected this. This does not mean that the entire difference between projected and actual sales, or the operating profit that was expected, is guaranteed. The connection between the losses actually incurred and the unlawful conduct must be examined specifically.

Accordingly, a franchisee considering a damages claim should secure evidence showing how the materials were provided, how they influenced the investment decision, and the actual expenditures and losses. Even if the refund demand period under Article 10 has passed, the possibility of a damages claim can be reviewed separately, so it is important not to confuse the requirements and exercise periods of a refund claim and a damages claim.

Points for Franchisors and Prospective Franchisees to Note

Franchisors should review not only the projected sales statement but also all materials delivered to prospective franchisees, including the website, business presentation materials, and profit tables used in consultations. In particular, to avoid situations where the written documents present conservative figures while staff describe higher sales or profits with certainty during consultations, the explanations given by staff must be aligned with the official materials.

In practice, it is important to keep records that allow verification of the calculation date and reference period of the figures, the reasons for selecting the comparison stores, the calculation method applied, and the scope of costs reflected. Even when reusing an existing template, the statement that the figures were "calculated in accordance with the law" should be checked against the actual calculation method. Because the disclosure document and the projected sales statement arise from different obligations, their respective provision requirements and timing also need to be managed separately.

When reviewing the expected profits presented, prospective franchisees should check the distinction between sales and net profit, the scope of costs reflected, and the trade area and operating period of the comparison stores. They should retain the materials provided by the franchisor and the explanations given during consultations, and have any conditions that may affect profits confirmed in writing. Once the business has deteriorated, it can be difficult to prove the circumstances and content of the information provided at the time using only after-the-fact sales data.

The information-provision rules under the Franchise Business Act exist to enable prospective franchisees to accurately assess the opportunities and risks of the business. A reasonable contract becomes possible when the franchisor clearly explains a reliable basis and its underlying assumptions, and the prospective franchisee can review them against the conditions of their own store. Managing the preparation and provision of profit information consistently is the starting point for preventing disputes and maintaining a stable franchise relationship.