Before Franchising in Taiwan: Clarifying Investment, Assets and Operating Responsibilities
Before opening an existing business to franchisees, look beyond the labels used for different franchise models. Map out assets, contracts, cash flow and decision-making authority to clarify what the franchisor and each franchisee will take on, and build a franchise network with clear responsibilities.
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A smoothly run company-owned outlet does not guarantee that responsibilities will remain clear when a franchisee takes over. Who leases the premises, owns the equipment, employs the staff and provides additional funding when the outlet makes a loss will all affect whether the relationship is sustainable. Before building a franchise network in Taiwan, businesses should separate out investment, asset ownership and operating responsibilities, then decide which model to adopt.
1. Map out responsibilities before choosing a franchise model
Terms commonly used in the market include ‘voluntary franchising’, ‘entrusted franchising’ and ‘business-format franchising’, but the actual arrangements can vary between brands. A model’s name alone does not establish that the franchisee owns the equipment, that the franchisor pays the rent or that the parties must share revenue in a particular ratio.
A more practical starting point is to answer four separate questions:
- Who provides the funding? Who pays for opening costs, working capital and any subsequent capital injections?
- Who owns the assets? Which legal entity owns the fit-out, equipment and stock, and holds the rights to deposits?
- Who runs the outlet? Who hires the manager, draws up staff rotas, handles customer refunds and makes day-to-day payments?
- Who bears the financial outcome? How are profits distributed, and who bears losses, bad debts and accidental damage?
For example, an arrangement in which the franchisee leases the premises, buys the equipment and hires staff has a different allocation of responsibilities from one in which the franchisor supplies a ready-to-operate outlet for the franchisee to run. Even if both involve royalty payments, the same contract should not simply be used for both.
Prepare a responsibility matrix identifying, for each activity, the funder, asset owner, decision-maker, party signing external contracts and party bearing any losses. Resolve any gaps or conflicting answers before starting franchisee recruitment.
2. Check each asset and third-party contract
An agreement between a franchisor and franchisee does not automatically change the rights of a landlord, equipment hire company or other third party. If the franchisor leases premises and allows a franchisee to use them, check whether the lease permits that arrangement and whether the landlord’s consent is required. Simply stating in the franchise agreement that ‘the franchisee is responsible for rent’ is not enough.
An asset register should cover at least the following:
| Item | Responsibilities to confirm |
|---|---|
| Premises and rental deposit | The tenant, the party actually paying, the permitted use arrangements and the party entitled to the returned deposit |
| Fit-out and fixtures | The funder, maintenance responsibilities and obligations to reinstate the premises at the end of the lease |
| Machinery and till equipment | The owner, hire or loan terms, and responsibility for maintenance and damage |
| Stock and consumables | Ownership, stocktaking procedures, and responsibility for losses from expiry or shortages |
| Online accounts and operational data | The registered account holder, access rights and data-processing responsibilities |
Ideally, each entry should be supported by verifiable documents, such as leases, invoices, equipment hire agreements or handover records. Payment by the franchisor does not necessarily mean that it retains ownership indefinitely; allowing a franchisee to use an asset does not necessarily mean that the asset has been sold.
When handing an existing company-owned outlet over to a franchisee, confirm the condition of equipment, stock quantities, outstanding orders and advance payments on the handover date. Otherwise, one party may retain payments received before the handover while the other bears the cost of providing the services afterwards.
3. Align decision-making authority with financial responsibility
Disputes are particularly likely where one party controls spending but the other bears all the losses. For example, if the franchisor can require additional staff or longer opening hours while the franchisee pays all the extra costs, an agreement that says nothing about the adjustment process leaves both parties struggling to manage expectations.
Divide day-to-day decisions into three categories: matters the franchisee can decide independently, matters requiring the franchisor’s prior approval, and requirements the franchisor can impose to maintain brand consistency. Define the scope of each category and explain how additional costs will be identified and allocated.
Financial arrangements should distinguish between ‘turnover’, ‘distributable earnings’ and ‘cash balance’. For a revenue-sharing arrangement, it is not enough to say that funds will be ‘distributed after deducting costs’. Define which costs are deductible, who approves them, when accounts are settled and which supporting records each party can inspect. Also confirm the account into which payments are received, the entity issuing invoices and the refund process, so that actual transactions match the accounting records.
Employment responsibilities must also be addressed. The agreement should specify who recruits staff, pays wages and fulfils statutory obligations. However, employer responsibilities still depend on the actual hiring, direction and supervision arrangements. A clause stating that ‘staff have no relationship with the franchisor’ does not, by itself, exclude those responsibilities. Arrangements involving direct management of outlet staff by the franchisor should undergo an employment law review first.
4. Assess the substance of the relationship under Taiwan’s rules
Taiwan has no single dedicated franchise law governing all aspects of franchising, but that does not mean franchising is unregulated. The Taiwan Fair Trade Commission’s Disposal Directions (Guidelines) on the Business Practices of Franchisors are an important reference, and the Commission addresses relevant conduct under the Fair Trade Act. Withholding material transaction information, for example, may fall within Article 25 of that Act.
Under the Guidelines, the defining features of a franchise relationship include contractual authorisation to use trademarks or operating know-how, ongoing operational assistance or guidance, and payment of consideration by the franchisee. Arrangements limited to buying goods at or below wholesale prices for resale, for example, fall outside that definition. Calling a document a ‘cooperation agreement’ or ‘entrusted management agreement’ therefore does not avoid the applicable rules: the substance of the arrangement still matters.
The allocation of responsibilities discussed here should also be reflected in the material transaction information provided before signing. This is particularly important for opening and operating costs, operating restrictions, and procedures for amending, terminating or rescinding the agreement. Do not promise during recruitment that ‘head office handles everything’, only to place the main costs on the franchisee in a contract appendix.
Contract performance and liability for breach also fall under Taiwan’s Civil Code, while trademark licensing is governed by the Trademark Act. Hiring staff and handling customer data must comply with the relevant labour and personal data protection requirements. Taiwan has no general franchise licensing regime. Mainland China’s ‘two outlets, one year’ requirement does not apply directly to Taiwan, although individual outlets must still obtain the registrations and permits applicable to their activities.
Practical takeaway: Before recruiting franchisees, complete a responsibility matrix and an asset register, then test the proposed arrangements against three scenarios: a rent increase, equipment failure and operating losses. Once you can answer ‘Who decides, who pays and who is responsible?’ in each scenario, ask legal and accounting professionals in Taiwan to formalise the arrangements in the relevant documents. This will give your franchise network a clear foundation for working together.
