Franchise

Franchise (프랜차이즈/特许经营, 가맹사업/加盟事業) is one of the brand new business types recently stipulated in a concrete manner in the Korean Commercial Act (상법/商法).

Franchising is a business method that involves licensing of well-known trademarks and business knowhow, and exclusive rights to sell such branded merchandise or services, e.g., McDonald's and Starbucks.

Key words
franchise, franchisor, franchise disclosure, special purpose company (SPC), cash flow, asset-backed loan (ABL).

Franchise in General
In Korea, francising is one of the brand-new commercial activities prescribed in the Commercial Act, which became effective on November 15, 2010.

Franchising is also regulated by the Act on the Fairness of Franchising Transactions (가맹사업거래의 공정화에 관한 법률), which is to secure the fair transaction rules and facilitate the mutually supplementary and balanced growth of franchisors and franchisees on equal footing.

See the recent amendment to the Franchise Act.

Franchise in Banking
Taking advantage of the characteristics of franchise, Korean banks are expected to enhance their non-financial support to their clients and increase their own fee business revenue.

The first business model is to consolidate the necessary operation and maintenance (O&M) of facilities in the same manner as franchising like the "CPM" method employing checklist, process and manuals. By doing so, the reduction of facilities O&M costs could lead to the enhanced satisfaction of users, and derivative business like the establishment of integrated facilities management systems and specialized O&M companies.

In order to facilitate this kind of business, standardization of contracts, typical O&M methods supported by sophisticated facilities management systems. Owing to the information asymmetry between the franchisor and would-be franchisees, the franchisor is required to disclose detailed information about its business operations under the relevant Korean law. But this requirement is exempted if no franchise front money is demanded by the franchisor.

The second business model is to borrow loans backed by the present and/or future cash flows generated from the licensing of trademarks and business knowhow, i.e., asset-backed loan (ABL). It is feasible when such specific franchise market has not yet been saturated and cash flows are assessed stable and sufficient, and the whole assets could be transferred to a special purpose company(SPC) which may apply for ABL from the banks. It means a new trend of fund-raising based upon the stable cash flows rather than conventional secured transactions, i.e., unquestionably attractive source of funds for a franchisor with insufficient collateral assets.

Therefore, financial institutions, specialized in long-term financing and equipped with path-finding consulting capabilities, have a good chance to encourage client companies to conduct the value-added new business, and to provide them with necessary financial assistance. As for Korean banks, it seems to be a lucrative business area when the franchising industry is growing in terms of tangible assets and profitability.

Franchise in Project Finance
In project financing, the concession agreement is usually called as the "franchise" agreement. It is because the project shall be implemented in accordance with specified guality standards and specifications controlled by the government.