Franchising in Taiwan: Setting Purchasing Requirements and Minimum Order Quantities

When opening an existing business in Taiwan to franchising, franchisors often want outlets to use the same ingredients and suppliers. However, an order quantity that a company-owned outlet can use up may be too much for a new franchise outlet. To build a resilient franchise network, purchasing rules must protect both quality and outlets’ cash flow, rather than simply pass suppliers’ delivery conditions on to franchisees.

1. Establish which purchasing restrictions are necessary

Do not simply state in the contract that ‘all materials must be specified by the franchisor’. First, review ingredients, packaging and consumables individually, and classify them according to practical needs:

• An approved source is essential: For core ingredients used in an exclusive recipe, for example, record the quality or technical requirements that the specified source safeguards.
• Specifications are mandatory, but alternatives are allowed: For standard packaging, for example, set out dimensions, materials and conditions of use, giving alternative suppliers clear criteria to meet.
• Outlets may source independently: For supplies with less impact on brand consistency, basic safety and quality requirements may be sufficient; centralised purchasing need not be compulsory.

Every restriction should answer three questions: what does it protect, why would a less restrictive approach be insufficient, and who approves exceptions? ‘Making management easier for head office’ should not be the sole justification for every restriction. Nor are purchasing requirements necessarily unlawful: the key considerations are their specific terms, necessity and effect on competition.

2. Validate minimum order quantities using pilot outlet data

Minimum order quantities should not be determined solely by a supplier’s carton or pallet size. First, examine pilot outlets’ daily usage, low-season sales, delivery lead times, storage capacity and the actual shelf life remaining when goods arrive.

Create a purchasing schedule listing each item’s minimum quantity per order, ordering increments, delivery frequency, delivery charge thresholds and estimated time needed to use the stock. In particular, distinguish between ‘smaller orders are allowed with an additional delivery charge’ and ‘orders below the specified quantity are prohibited’. These have different implications for an outlet’s working capital.

Do not base testing solely on averages from busy outlets. Model a new outlet’s build-up in sales, consecutive quiet days and delivery delays to check whether stock could expire before it is sold. If minimum quantities clearly exceed reasonable usage, first negotiate split-case deliveries, pooled purchasing or staggered deliveries, rather than requiring franchisees to bear foreseeable wastage.

3. Include purchasing costs and restrictions in pre-contract disclosure

Taiwan does have franchise-specific regulatory guidance. The Taiwan Fair Trade Commission has issued the Fair Trade Commission Disposal Directions (Guidelines) on the Business Practices of Franchisors, which operate alongside the Fair Trade Act in addressing franchise transactions. Matters such as contractual performance also fall within the scope of the Civil Code. These guidelines are not a system of government certification or approval for franchise brands.

Under the current guidelines, franchisors must provide material franchise information ten days before entering into a franchise relationship or a preliminary franchise relationship, or within a period considered reasonable in the particular case or agreed by both parties. Separate provisions cover exceptions where there are legitimate grounds. Purchasing-related disclosures include fees payable to the franchisor or designated parties before opening and during operation, as well as restrictions within the franchise relationship. Required sources, brand specifications, items to be ordered on each occasion and minimum quantities should not be left undisclosed until after an outlet opens.

Failure to provide information as required may breach Article 25 of the Fair Trade Act if it is sufficient to affect trading order. However, advance disclosure does not automatically make a term lawful. Purchasing restrictions themselves must still be assessed against current fair trade rules and the circumstances of each case.

In practice, provide price lists, minimum order conditions, delivery charges and price validity periods together. Clearly label any costs that cannot yet be confirmed as estimates and explain how they have been calculated. Avoid presenting temporary discounts as long-term costs.

4. Set out procedures for shortages and other problems in the contract

The stricter the purchasing requirements, the more important it is for the franchisor to have a workable contingency plan. The contract and purchasing schedules should address at least the following:

• Supply disruption: Who must notify whom, when a response is due, and whether outlets may apply to use temporary substitutes.
• Problems identified on receipt: What evidence is required, and how replacements, returns or exchanges will be handled for short deliveries, damage, non-compliant specifications or insufficient remaining shelf life.
• Approval of alternatives: What samples or supporting documents must be submitted, who decides whether requirements are met, and how long approval remains valid.
• Quantity exceptions: How outlets can request a lower minimum order quantity during the initial trading period, a temporary closure or a significant fall in demand.

Avoid prohibiting outside purchasing while making no provision for shortages at the designated supplier. The responsibilities of the franchisor, supplier and franchisee should align throughout the ordering process, rather than each party working to a different understanding.

Practical takeaway: Before recruiting franchisees, complete a purchasing schedule covering ‘reason for designation, minimum quantity, full cost and shortage alternatives’, and test it against a low-sales scenario. Only incorporate purchasing terms into the franchise agreement once both the quality requirements and the financial burden on outlets stand up to scrutiny.