Franchise Stock Risks in Taiwan: Checking Minimum Orders, Unsold Stock Returns and Write-off Responsibilities
Reasonable unit prices do not necessarily mean manageable stock costs. Before joining a Taiwanese franchise, check minimum orders, automatic deliveries, returns of slow-selling stock and responsibility for write-offs to avoid tying up cash on the shelves.
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When choosing a Taiwanese franchise, many prospective franchisees compare ingredient and material prices but overlook two questions: how much must they buy each time, and who bears the cost if it does not sell? Centralised supply helps franchise networks maintain consistent quality, but stock arrangements also directly affect cash flow. Before signing, assess purchasing obligations, shelf life and options for clearing stock together, rather than focusing solely on purchasing discounts.
1. Identify every mandatory purchasing arrangement
Minimum order requirements may appear not only in the franchise agreement, but also in ordering platform rules, opening stock lists, promotional notices and operations manuals. Ask the franchisor for the current versions and an item-by-item explanation of which requirements are recommendations and which are compulsory.
In particular, distinguish between the following arrangements:
- Minimum quantity per product: Must you buy a full case of each product, or can you mix products within a case?
- Minimum order value: If you fall below the threshold, do you simply pay an additional delivery charge, or are you unable to order at all?
- Scheduled deliveries: Will the franchisor automatically dispatch stock and collect payment? Can the franchisee pause deliveries?
- New product and promotional allocations: Does taking part in a promotion mean accepting a specified quantity of stock? If a trial sells poorly, can the next allocation be reduced?
Rather than simply asking how much franchisees usually have to buy, request a complete list for your proposed outlet format, setting out what triggers each requirement, how quantities are calculated and who can authorise changes. If the franchise recruitment team says there is flexibility, establish who can approve exceptions and whether approval must be recorded in writing.
2. Understand Taiwan’s disclosure rules, but do not mistake disclosure for a buy-back guarantee
Taiwan does not have a single dedicated franchise law covering every aspect of franchising. Franchise transactions are governed by the Fair Trade Act and general civil law. The Fair Trade Commission also has guidelines on the handling of cases involving franchisors’ business conduct, addressing fair trading issues in franchise recruitment and contracting.
Under point 3 of these guidelines, franchisors should provide important franchise information ten days before entering into a franchise or preliminary franchise relationship, within a period considered reasonable in the particular case, or within a period agreed by both parties. The required information on restrictions during the franchise relationship expressly includes the products or raw materials that must be ordered each time and their minimum quantities. Fees payable to the franchisor or designated suppliers during operations also fall within the scope of disclosure.
Failure to provide the required information without a legitimate reason may breach Article 25 of the Fair Trade Act if it is sufficient to affect trading order. This does not mean that all minimum order requirements are unlawful, nor that disclosure automatically gives franchisees a right to return goods.
Disclosure tells you what obligations you face; the contract still needs to explain how stock will be dealt with. Do not assume that business purchases come with the unconditional returns commonly associated with consumer online shopping. Rights relating to slow-selling, defective and short-dated goods may have different legal bases, so check the contractual terms and applicable law separately for each.
3. Test stock levels against the remaining selling window, not just the discount
Ask the franchisor for the main products’ pack sizes, shelf lives, minimum remaining shelf life on arrival, storage requirements and replenishment lead times. Knowing the total shelf life from the production date is not enough: the time already consumed by transport and warehousing determines the risk the franchisee actually takes on.
Use ‘mandatory order quantity ÷ conservatively estimated daily usage’ to estimate how many days it will take to use a batch, then compare this with the number of days it can still be sold after arrival. This is only an initial stress test, not a sales forecast. Also deduct existing stock from your replenishment needs to avoid building up more stock with every order.
Run separate tests for the opening period, normal trading months and the low season. Check whether different ingredients must be used together: if one runs out, could the others expire because you cannot make the finished product? Can promotional packaging still be used once the campaign ends?
When comparing brands, ask each franchisor to propose a stock allocation using the same conservative sales assumptions and explain which elements can be adjusted. An arrangement offering smaller discounts but allowing smaller replenishment orders is not necessarily more expensive than bulk purchasing. Include storage, delivery, write-offs and the cost of tied-up capital in your calculations.
4. Turn returns, exchanges and write-off procedures into workable contract terms
‘Head office will help’ is not a clear route for dealing with unwanted stock. Before signing, ask for separate provisions covering different situations, rather than allowing all unsold goods to become the franchisee’s responsibility by default.
| Situation | Arrangements to confirm |
|---|---|
| Incorrect goods, quantity discrepancies or damage on arrival | Inspection deadlines, evidence required, replacement lead times and responsibility for delivery costs |
| Insufficient remaining shelf life on arrival | Minimum remaining shelf-life standards and procedures for rejecting or exchanging goods |
| The franchisor discontinues a product or changes its packaging | Whether existing stock can still be sold, returned or compensated for |
| Poor sales of new products or excessive compulsory allocations | Whether quantities can be reduced or stock transferred between outlets, and whose approval is needed |
| Expired stock requiring disposal | Who bears the cost, whether photographic evidence is required and how the write-off should be recorded |
Also clarify whether a ‘return’ means a cash refund, credit against the next order or an exchange for other goods only. Credit against future purchases may not actually release tied-up cash. Any claim deadlines or quantity limits should also form part of your assessment.
Keep delivery notes, batch details, photographs showing expiry dates and records of reported problems. Agree a deadline for the franchisor to respond. For disputed goods, confirm storage and disposal procedures first, so that you do not lose evidence by destroying them yourself.
Practical takeaway: Before signing, draw up a one-page checklist covering ‘how much you must buy’, ‘how long you can still sell it after arrival’ and ‘what happens if it does not sell’. If any answer rests on a verbal promise alone, get it incorporated into written terms before deciding whether to accept the stock risk.
