Franchising in Taiwan: How to Structure Royalties and Minimum Fees Without Overburdening Outlets in the Low Season

If you are preparing to franchise an existing business in Taiwan, do not set royalties simply by copying other brands’ charges. A profitable company-owned outlet may not have enough cash left once the additional costs of franchising are deducted. A sound royalty structure should support both the franchisor’s ongoing services and the outlets’ long-term viability. The key question is not just the percentage charged, but how much an outlet must pay in a low-turnover month.

1. Calculate the cost of ongoing support before choosing a fee model

Start by listing the services the franchisor will continue to provide after an outlet opens, such as operational supervision, product updates, training material maintenance and day-to-day advice. Distinguish between costs incurred for every outlet, costs that grow with the network, and work required only at launch. Avoid using one-off set-up expenditure as the sole justification for permanent charges.

Also establish what other fees already cover. If system access, training or marketing fees are charged separately, the royalty description should not vaguely claim to include all support. Fees can be itemised separately, but franchisees must be able to understand their total outgoings and the scope of services provided.

There are three common models:

• Fixed fee: The amount payable each period is easy to budget for, but it takes up a larger share of turnover when sales fall.
• Turnover-based royalty: The fee moves with turnover, but turnover is not profit. It can still put pressure on an outlet when gross margins fall.
• Turnover-based royalty with a minimum fee: This gives the franchisor a baseline income, but can leave outlets facing something close to a fixed-fee burden during the low season.

Do not simply ask which model will attract the most franchisees. Ask whether it enables the franchisor to deliver the promised support while allowing franchisees to pay wages, rent and essential stock replenishment costs.

2. Test minimum fees against low-season scenarios

Build a financial model using actual records from existing outlets, but add the franchise-related charges that company-owned outlets have not had to pay. At a minimum, test normal trading, the initial ramp-up period and the low season. Include reasonable remuneration for the owner’s own work; otherwise, unpaid owner labour can easily be mistaken for profitability.

For each scenario, set out turnover, cost of goods, rent, staffing, utilities, other ongoing expenses and the royalty calculated under the proposed terms. Then check how much cash remains to fund day-to-day operations.

For minimum fees, pay particular attention to the effective royalty rate: the royalty payable for the period divided by turnover for that period. Even if the contract specifies an apparently modest percentage, the effective rate can rise substantially once the minimum fee applies. Where turnover is zero, the ratio cannot be calculated, making it all the more important to examine the actual cash payment still required.

If low-season scenarios repeatedly show cash shortfalls, revisit the minimum fee, the date charges begin or the overall cost structure. Do not substitute “franchisees just need to work harder” for changes to the model. If you offer reduced or waived fees during the ramp-up period, also test whether the outlet remains viable once that relief ends.

3. Clearly define the calculation basis and exceptional trading periods

Once you have chosen a model, the contract must do more than say that fees are “calculated on turnover”. Specify whether turnover includes tax, how discounts are treated, whether refunded transactions are deducted, and whether delivery-platform sales are calculated using the amount paid by the customer or the amount received after platform charges. For gift vouchers and prepaid balances, state when they are included in turnover to avoid charging royalties both when they are sold and when they are redeemed.

For minimum fees, clearly distinguish between two entirely different arrangements: “the higher of the percentage royalty or the minimum amount” and “a fixed amount plus a percentage royalty”. A recruiter’s reference to a “base royalty” does not adequately explain the difference.

Use a schedule to set out how fees are calculated in the following circumstances:

• Whether charges are prorated by day if the first month of trading is not a full calendar month.
• Whether the minimum fee still applies when there is no turnover during the period.
• Whether temporary closure due to equipment failure or other causes qualifies for a reduction or waiver.
• The final charging date and treatment of a partial month when the agreement ends.

If franchisees may apply for a reduction or waiver, specify eligibility, supporting documents, the approval timeframe and the period covered. Do not rely solely on “discretionary consideration”, or allow recruiters to make verbal promises of automatic exemptions.

4. Meet Taiwan’s disclosure requirements, rather than simply advertising a royalty percentage

Taiwan does not have a single, dedicated franchise statute, but franchise recruitment is still subject to specific rules. The Taiwan Fair Trade Commission’s principles for handling cases involving franchisors’ business practices draw on the Fair Trade Act as a basis for enforcement. Contractual rights and obligations must also be considered under general legislation, including the Civil Code.

These principles expressly cover how ongoing fees, including royalties, are calculated, as well as the amounts or estimated amounts payable to the franchisor or parties it designates. Minimum fees, additional charges and the burden after fee relief expires should therefore not be buried in contract schedules without explanation. Recruitment should not rely solely on a promotional-period percentage.

Important information should be provided ten days before a franchise relationship or preliminary franchise relationship is entered into, or within a period considered reasonable in the particular case or agreed by both parties. Failure to provide the required information without proper justification may breach Article 25 of the Fair Trade Act if it is sufficient to affect trading order. Disclosure does not, in itself, make a contractual term valid, so have the terms reviewed by a lawyer familiar with franchise transactions in Taiwan.

Practical takeaway: Before recruiting franchisees, prepare a fee-model comparison table, a low-season stress test and a one-page worked example of the charges. Making clear “how much you still have to pay when business is slow” will do more to build lasting trust than advertising a low royalty percentage alone.