As small businesses tumble, gov't pushes to end franchise contract termination fees

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As small businesses tumble, gov't pushes to end franchise contract termination fees

Published: 24 Jul. 2025, 14:46 Updated: 24 Jul. 2025, 15:03

Audio report: written by reporters, read by AI

Prospective entrepreneurs receive consultations at the 77th World Franchise Expo held at Seoul Trade Exhibition Center in Gangnam District, southern Seoul, on April 17. [YONHAP]

The government is pushing a plan to allow struggling franchise owners to terminate contracts without paying penalties, describing it as a step toward restoring the everyday economy. But critics warn it could lead to increased risk exposure by facilitating indiscriminate closures without sufficient self-help efforts.

The Fair Trade Commission (FTC) said Wednesday that Chairman Han Ki-jeong had briefed President Lee Jae Myung on the proposal. The plan would create a legal basis for franchisees to cancel contracts without paying penalties if they incur continued operating losses.

The measure comes in response to a sharp rise in business closures, which last year exceeded 1 million for the first time.

An FTC official said the policy remains under development.

“No detailed measures have been finalized yet,” the official said. “Once the plan is settled, we will revise the relevant laws or presidential decrees.”

Currently, the Fair Transactions in Franchise Business Act allows franchisees to avoid penalty fees only if sales during the first year fall short of the franchisor’s projected minimum. The government is looking to expand this clause to grant broader relief for franchisees whose business performance falls below expectations after the initial year.

Shops line a commercial street in Seoul on June 16. [YONHAP]

Online forums for small business owners have seen a flood of posts about excessive penalty fees.

One franchisee wrote last month: “I opened a pizza delivery franchise hoping to make ends meet, but ended up with a 24 million won [$17,548] loss over two years. I had to close, but headquarters demanded 15 million won, not even for indemnity but as a penalty for breach of contract since I closed early.”

Many others shared stories of wanting to close but feeling trapped due to large financial obligations tied to penalties, shop renovation costs and equipment removal fees.

The most common franchise-related dispute filed last year — 24 percent of 584 total cases — involved excessive penalty charges for early termination, according to the Korea Fair Trade Mediation Agency.

Franchise consultant Kang Myeong-seo said such disputes are rising.

“With more businesses closing, we’re seeing more disputes over penalty fees,” Kang said. “Franchisors often exaggerate expected revenues during contract signing, but still demand heavy penalties when a franchisee withdraws.”

Kang added that some franchisors charge “as much as 20 million to 30 million won without considering the remaining contract length or who is at fault.”

“Penalty fees, along with shop renovation and demolition costs, place a heavy burden on franchisees when they shut down."

A vacant store is up for lease in Myeong-dong, central Seoul, on May 18. [YONHAP]

While the FTC proposal aims to reduce burdens on struggling self-employed workers, business groups and industry insiders warn that it could disrupt the franchise sector.

“Penalty clauses ensure accountability for both franchisors and franchisees,” said Kim Jong-baek, policy spokesperson at the Korea Franchise Association. “Canceling contracts solely because of operating losses doesn’t align with the principles of a free market economy.”

Kim cautioned that “removing financial consequences might lead to a higher risk appetite,” and urged a careful approach, citing potential ramifications for the entire industry.

A convenience store chain insider echoed these concerns.

“There are many reasons why stores close, and institutionalizing penalty waivers would mean shifting all the risk to headquarters,” the official said. “If termination requests from franchisees continue to rise, it could destabilize the entire market.”

Another franchise industry representative warned of unintended side effects.

“If it becomes too easy to open and close stores, we might see a flood of poorly managed franchise brands exploiting the system,” the insider said.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.
BY HWANG SOO-YEON [[email protected]]