Franchising a Business in Taiwan: How to Set Sustainable Franchise Fees and Royalties

When opening an existing business in Taiwan to franchisees, a common question is: how much should the franchise fee be? The answer should not depend solely on brand recognition or competitors’ price lists. You need to establish what services each fee pays for and whether both sides can sustain the arrangement over time. A healthy franchise network needs a head office capable of providing ongoing support, as well as franchisees with sufficient financial room to run viable businesses.

1. Break down costs before deciding what to call each fee

Start by dividing head office activities into ‘one-off pre-opening work’ and ‘ongoing support after opening’. The former includes site assessments, initial training and launch support; the latter includes outlet visits, product updates, system maintenance and day-to-day operational support. Avoid bundling every cost into a single franchise fee, as this can lead to disputes over the scope of services later on.

Create an internal cost schedule showing who is responsible for each task, the estimated working hours, external expenses and deliverables. Training delivered personally by the founder still has a cost, even if no separate salary is currently paid for it.

Fees can be grouped by function:

• One-off franchise fee: Covers joining the network, the initial licence and opening support. Clearly state what is and is not included.
• Ongoing royalties: Fund the continuing licence and operational services. These may be a fixed amount, a percentage of turnover or another clearly defined charge.
• Earmarked fees: These include pooled marketing contributions and system fees. Explain their purpose, who is responsible for managing them and how their use will be reported.
• Security deposit: This is not a substitute for current income. Specify how it will be held, what deductions may be made and when it will be returned.

If the same service is funded through more than one fee, explain what each charge covers so that franchisees do not feel they are being charged twice.

2. Test affordability using cash flow projections for both sides

Prepare separate cash flow projections for franchisees and head office, at a minimum. For franchisees, include not only franchise-related charges but also rent, wages, ingredients or materials, platform commissions, taxes and charges, equipment repairs and working capital. If the owner works in the business, allow for reasonable remuneration: unpaid labour should not be counted as profit.

For head office, check whether recurring income can cover the support promised. If you must continually recruit new outlets and use their initial franchise fees to subsidise services for existing ones, the fee structure may not be sustainable.

Use existing operating data to model base-case, lower-sales and delayed-opening scenarios, stating every assumption. The aim is not to present an attractive payback period, but to answer practical questions: if turnover falls, can franchisees still meet essential expenses? Will head office still have the resources to provide training and outlet visits?

Fixed royalties are easier to budget for, but the burden does not fall with revenue during quieter periods. Turnover-based royalties track changes in revenue more closely, but require reliable sales data. Neither approach is inherently best: choose according to actual support costs and fluctuations in outlet revenue.

3. Put calculation rules and exceptional circumstances in the contract

Saying that a fee is ‘based on turnover’ is not enough. The contract should define whether turnover includes tax, how discounts and refunds are treated, whether delivery-platform orders are measured before or after commission, and whether gift vouchers are recognised when sold or redeemed. Each distinction affects the amount payable.

Also specify the settlement cycle, payment dates, sources of sales data, rights to verify that data and procedures for correcting errors. You can attach a worked example for a hypothetical month, but make clear that it illustrates the formula rather than forecasts income.

For pooled marketing contributions, explain who decides how the money is spent, how its use is reported and whether it covers head office’s cost of producing marketing materials. Do not suggest that pooled marketing gives every outlet equal exposure or guarantees sales growth. If head office also earns income from supplying goods, assess the franchisee’s overall financial burden rather than simply highlighting low royalties.

Finally, address exceptional circumstances: if opening is delayed, trading is suspended, the franchise is transferred or renewed, or the agreement ends early, which fees remain payable, are reduced or waived, or are refunded? Fee increases should also have a clear basis, procedure and notice arrangements, rather than relying on a broadly worded unilateral right to raise charges.

4. Ensure fees comply with Taiwan’s legal requirements

Taiwan has no single dedicated franchise statute, but this does not mean franchise fees are unregulated. The Taiwan Fair Trade Commission’s Disposal Directions (Guidelines) on the Business Practices of Franchisors are an important reference, covering the disclosure of material transaction information, including pre-opening and ongoing operating fees. These are administrative guidelines used by the Commission when handling cases, not a separate franchise law. Concealing material charges and similar conduct may, where the relevant legal criteria are met, constitute deceptive or obviously unfair conduct under Article 25 of the Fair Trade Act.

Fees, refunds and liability for breach of contract are also governed by general legislation, including the Civil Code. Pre-drafted terms are not necessarily enforceable simply because they have been signed: attention must still be paid to the fairness of standard contract terms and whether contractual penalties are excessive. Nor should franchisees entering into contracts for business purposes assume that they receive all the protections available in ordinary consumer transactions.

Before formally recruiting franchisees, have a lawyer familiar with franchising practice in Taiwan review the fees and contract, and an accounting professional confirm the tax treatment, supporting documentation and accounting entries. Do not mistake market practice for legal approval.

Practical summary: Start with a cost schedule, then test cash flow for both sides, and finally set out the formulas, services and exceptional arrangements clearly. A fee structure is ready to introduce across a franchise network only when every charge has an identifiable purpose, a calculable amount and services that can actually be delivered.