Baek Jong-won, the representative of the restaurant franchise corporation Theborn Korea, said last October when promoting the initial public offering (IPO) that there were concerns about owner risk, stating, “What could I possibly mess up at this age?” Owner risk refers to the potential problems that arise when a major shareholder operates unilaterally or causes incidents that lead to management issues.
Baek also noted concerning the worries about owner risk, “I have had no issues in my 10 years of media exposure.”
However, within less than six months, controversies surrounding Baek Jong-won ignited. The scrutiny began with allegations regarding the pork content in the processed food 'Ppaek Ham' and the citrus content in citrus beer, which expanded into suspicions of origin violations. Eventually, Representative Baek became the subject of a police investigation for violating the Origin Marking Act.
Recently, allegations of violating the Food Sanitation Act emerged. Theborn Korea reportedly sprayed apple juice with a pesticide sprayer at the Hongseong Global Barbecue Festival in November 2023, and video evidence revealed the use of what appeared to be construction materials as barbecue grill tools.
The phenomenon of innocent franchise owners suffering due to the misconduct of key personnel at the headquarters continues to repeat.
According to ChosunBiz on the 18th, some franchise owners of Theborn Korea expressed that their sales have decreased due to various controversies caused by Representative Baek.
Jung Yoon-ki, the chairman of the Yeondon Bulkats franchise association, said, “Since the day when the origin marking issue arose, sales have dropped by 30% compared to the previous day,” adding, “The decline is too significant to merely blame the market.”
Since last year, more than 60 franchise stores of this brand have closed, leading to a closure rate of up to 72%.
◇ Actual sentences, sexual harassment, assault... The 'owner risk' dark history of franchises
There are not few cases where owner risk has dealt fatal blows to franchise owners even before Representative Baek.
In November of last year, the police referred Kim Yong-man, founder of Kim Kane, to the prosecution on charges of attempting to sexually assault a female employee (quasi-rape and violation of the Sexual Violence Punishment Act). Chairman Kim is also currently facing embezzlement charges amid allegations that he misappropriated company funds during the settlement process with the victimized female employee.
Following this, a boycott movement against Kim Kane emerged mainly in online communities. Some franchise owners terminated their contracts or changed their signage to other brands.
Kyochon Chicken faced damage to its corporate image when Chairman Kwon Won-gang's sixth cousin, Kwon Sun-cheol, an executive at Kyochon F&B, was revealed to have assaulted employees at a restaurant. Chairman Kwon himself temporarily stepped down from his position due to this incident.
Average sales at Kyochon Chicken franchise stores have steadily decreased since then. Sales per area of Kyochon Chicken franchise stores, which were 35.1 million won in 2021, decreased to 31.83 million won in 2023. Consequently, average sales also dropped by 8% from 753.72 million won to 694.30 million won.
Ho Sik-i Dumari Chicken saw its franchise sales plummet by 40% when former Chairman Choi Ho-sik was sentenced to prison for sexual harassment of a female employee. Aori Ramen, founded by Seungri, a member of the popular group Big Bang, went bankrupt following the 'Burning Sun scandal.'
◇ The headquarters endure while the franchisees crumble... “76% of consumers turn away”
Franchise headquarters can overcome crises due to owner risk based on their capital strength. Most major franchises that have experienced owner risk in the past still operate their respective brands.
In contrast, individual franchise owners suffer direct blows from daily sales declines. According to a survey on brand trust among franchise brands conducted by the Korea Consumer Agency, 76% of consumers responded that they would reconsider using a brand if negative incidents occur at the franchise headquarters.
Experts emphasized the need for realistic measures to protect franchise owners who have suffered due to owner risk.
The Fair Trade Commission established in a 2019 amendment to the ‘Act on the Fairness of Franchise Transactions’ (Franchise Transaction Act) that if a franchise headquarters or its executives cause damage to franchise owners through illegal or unethical actions, they must bear liability for compensation. This is a measure taken to prevent franchise owners from suffering losses as a result of unforeseen owner risks.
‘가맹 본부는 가맹점주와 가맹 계약을 맺을 때가맹 본부 임원의 위법행위 또는 브랜드 명성·신용을 훼손하는 행위로가맹 사업자에 브랜드 이미지 실추, 매출액 급감 등 손해가 발생할 경우본부가 배상 책임을 진다는 내용을 계약서에 명시해야 한다.Article 14-2 of the Act on the Fairness of Franchise Transactions states that ‘the franchise headquarters must stipulate in the contract that if damages occur to the franchisee due to the illegal acts of the executives of the franchise headquarters or actions that tarnish the brand's reputation and credit, the headquarters will be liable for compensation.’
However, it is not easy to receive actual compensation. According to the law, to receive compensation, franchise owners must prove the correlation between the owner risk incident and the decline in sales. The time and legal expenses incurred are also borne entirely by the franchise owners.
Lee Su-min, representative of SM Franchise Research Institute, said, “The compensation clause in the current franchise transaction law is abstract, making the legal interpretation unclear, and the responsibility for proving damage also falls on the franchise owner,” adding, “In civil lawsuits, the party with the burden of proof often loses, making it very difficult to demonstrate damage and thereby lacking effectiveness.”
Bong Gusu's Burger, which had nearly 1,000 stores nationwide, suffered a reputational blow as founder Oh Se-rin was convicted on drug charges, thus earning the nickname 'Drug Burger.' Franchise owners filed a collective lawsuit against Oh and the headquarters for damages but lost the case.
At that time, the court stated, “It is difficult to accept the claims of the plaintiffs in a situation where even economic damages have not been clearly proven.”
◇ “Should the burden of proof for damages rest solely on franchise owners?”... Limitations of the Franchise Transaction Act
Sales at domestic franchise stores have surpassed 100 trillion won. The total number of franchise stores also exceeds 290,000, breaking record highs every year.
Within the franchise industry, there is a consensus that there is a need for owner risk management and franchise owner protection systems that match the expanded scale.
In the United States, the Federal Trade Commission (FTC) mandates transparency of franchisor information through Franchise Disclosure Documents (FDD). Franchise business operators are required to disclose details of bankruptcies and ongoing lawsuits concerning themselves and their predecessors, as well as dates of court judgments and settlement terms for past litigation. Japan protects franchise owners from owner risk through civil and commercial laws.
Lee Young-seok, a lawyer at Barun Mirae Law Firm, stated, “It is difficult to determine specific damages with the content specified in the standard franchise contract,” and added, “It is necessary to explicitly state the compensation scope in the contract by including phrases such as ‘compensation will be made for the amount reduced compared to the average monthly operating profit of the previous year after the occurrence of owner risk’ or include special clauses such as ‘immediate termination of the franchise upon occurrence of owner risk.’