Franchising in Taiwan: Setting Out Franchise Transfer and Approval Procedures

If you are preparing to franchise an existing business in Taiwan, you need to consider not only how outlets will open, but also how franchisees might eventually transfer them. Retirement, family commitments or changes in shareholding may all prompt an operator to exit. Establishing a workable transfer procedure in advance can prevent situations where a seller has already accepted a deposit before the franchisor discovers that the buyer does not meet its requirements. It also helps maintain operational stability across the franchise network.

1. Define which changes require the franchisor’s approval

A clause stating that ‘franchise outlets must not be transferred without approval’ may sound straightforward, but it may not be enough. Selling equipment, transferring a franchise agreement and changing the controlling shareholder of a franchise company are different transactions. The franchisor should specify which situations require an application in advance, which require notification only, and the criteria used to distinguish them.

The following situations should be addressed separately:

• Asset sales: selling equipment or stock does not automatically give the buyer the right to use the brand.
• Transfer of the agreement: where another business entity takes over the franchise rights and obligations, clarify how the relevant parties must give consent and sign the necessary documents.
• Changes of control: even if the company name remains the same, a change in its major shareholders or ultimate controller should be reviewed in accordance with the agreement.
• Changes of operator: replacing the person responsible for day-to-day operations, while the investors remain unchanged, may not warrant treating the change as a transfer of the entire outlet.

The clauses should clearly define what triggers a review. Avoid treating every staffing change as a transfer, but do not allow share transactions to become a way of bypassing checks on an incoming franchisee. Inheritance and corporate restructuring should be reviewed separately by a Taiwanese lawyer; do not assume that standard sale and purchase clauses will be sufficient.

2. Include transfer restrictions in pre-contract information

Taiwan does not have a single dedicated franchise law, but this does not mean that franchise transactions are unregulated. The formation, validity and performance of franchise agreements involve the Civil Code, while commercial conduct is also governed by the Fair Trade Act.

The Fair Trade Commission’s Guidelines on the Business Practices of Franchisors require the disclosure of material franchise information. This includes restrictions during the term of the franchise agreement, as well as the conditions and procedures for amending, terminating or rescinding it. Whether a transfer requires approval, what requirements an incoming franchisee must meet, and when the outgoing franchisee is released from liability should all be explained in advance, rather than raised only when someone asks to transfer an outlet.

Under the guidelines, material information must be provided ten days before a franchise or preliminary franchise relationship is established, or within a period considered reasonable in the circumstances or agreed by both parties. There is a separate requirement to allow at least five days for reviewing the agreement, or a period considered reasonable in the circumstances. These are distinct procedures and should not be conflated. Failure to comply with the relevant requirements, where sufficient to affect trading order, may constitute a breach of Article 25 of the Fair Trade Act. This does not mean that every omission in the paperwork automatically invalidates the agreement.

If the franchisor enters into a separate franchise relationship with the incoming franchisee, it should also arrange the applicable disclosure and contract review procedures afresh. The fact that the outlet has remained in operation is no reason to assume that the incoming franchisee already understands all the terms.

3. Establish an approval process with clear criteria and responses

The franchisor should retain reasonable rights to assess an incoming franchisee, but avoid relying solely on wording such as ‘approval is at the franchisor’s absolute discretion’. A more practical approach is to provide an application checklist, assessment criteria and a named role responsible for each stage, so franchisees know how to proceed.

Application materials may include the proposed transaction structure, the incoming franchisee’s operating experience and intended level of involvement, a funding plan, the proposed handover date, and any outstanding payments or operational matters at the existing outlet. The franchisor should collect only information needed for the assessment, not unrelated personal details.

The process can move through checks for completeness, an interview with the incoming franchisee, an assessment of operational capability, conditional approval and handover confirmation. Response deadlines are service standards set by the franchisor and should not be presented as statutory deadlines. If information is missing, specify clearly what still needs to be supplied.

The approval documents should be particularly clear on the following points: will the incoming franchisee take over the remaining term of the existing agreement or sign a new one? Will existing arrangements continue? Is training required? May the brand be used before all conditions have been met? If approval is refused, record specific reasons, such as an inability to provide suitably qualified operating staff, rather than simply stating that the applicant is ‘unsuitable’.

Any transfer assessment fees, training fees or other necessary charges should also be disclosed in advance, including how they are calculated, when payment is due and how they will be handled if the application is rejected. Do not introduce undisclosed charges when the transaction is close to completion.

4. Use a handover checklist to distinguish outgoing and incoming responsibilities

Approval of an incoming franchisee does not mean that the franchisor guarantees the outlet’s sale price, asset condition or trading performance. The documents should distinguish the franchisor’s approval role from the buyer’s and seller’s responsibilities for carrying out their own checks and negotiating the price.

The handover checklist should cover at least three areas. First, conditions for the transfer to take effect: all necessary documents have been signed, relevant consents obtained and required training completed. Second, the financial cut-off: who will settle or fulfil royalties, payments for goods, advance payments received and outstanding customer orders relating to the periods before and after handover. Third, release from liability: whether the outgoing franchisee’s and any guarantors’ existing liabilities remain in place, and when they are released, must be expressly addressed. This cannot be inferred simply from handing over the keys.

For transactions that have not yet been approved, the franchisor can provide a clear explanation of the process and remind both parties to address the consequences of approval being refused in their sale and purchase documents. It should not, however, act as a substitute for their legal advisers. Arrangements involving employees, leases or other third-party rights must also be confirmed separately: an approval letter from the franchisor cannot replace the necessary consents.

Practical takeaway: Before offering franchises, prepare transfer clauses, an approval process chart and a handover checklist. Showing franchisees how to apply, what criteria the franchisor will use and who will be responsible for what after handover will do more to support the franchise network’s long-term operation than a simple ban on transfers.