Buying a Franchise in Malaysia: Check Exclusive Territory Rights

A busy location does not necessarily protect you from competition within the same brand. Before buying a franchise in Malaysia, understand who can sell to customers in your area, through which channels and under what conditions. Clear territory rights help maintain relationships within a franchise network and reduce disputes as it expands. Do not assess the word “exclusive” in isolation from the rest of the agreement.

1. Distinguish between an approved location and an exclusive territory

Approval to open premises at a particular address does not necessarily give you exclusive rights over the surrounding area. Similarly, the phrase “operating area” may simply define where you are allowed to trade, rather than prevent the franchisor from opening nearby outlets.

Malaysia has specific legislation, the Franchise Act 1998, including amendments made in 2020. Section 18 requires franchise agreements to be in writing and to include, among other things, the territory rights granted to the franchisee. However, the requirement to specify those rights does not guarantee that every franchisee receives an exclusive territory.

Ask the franchisor to clarify whether your offer involves:

• Rights for a single outlet: permission to operate only at a specified address.
• A non-exclusive territory: a defined operating area that other operators may also be allowed to enter.
• A conditionally exclusive territory: protection that applies as long as certain conditions are met.

Ask your lawyer to review the actual effect of the wording used. Do not rely on verbal assurances that an area is “definitely yours”.

2. Establish boundaries that can be checked

Area descriptions such as “the city centre” or “around Petaling Jaya” are too vague to form the basis of an investment. Boundaries must be clear enough for both parties to determine whether a new location falls inside or outside the territory.

Ask for a map to be attached to the agreement, together with the method used to define the boundaries. If a radius is used, specify the centre point and whether the distance is measured in a straight line or by road. If postcodes or administrative boundaries are used, establish how future boundary changes will be handled.

Check for excluded locations as well. A shopping centre, hospital, campus or transport station within your territory may be reserved for the franchisor or another operator.

As a test, choose a few addresses near the boundary and ask: “Could an outlet of the same brand open here?” The answer should be clear from the documents, rather than left to a salesperson’s discretion.

Make sure the map, list of exclusions and agreement wording do not conflict. Specify which document takes precedence if there is a discrepancy.

3. Check who controls sales beyond your premises

Protection against new physical outlets may be less valuable if online sales fall outside its scope. Customers in your area may still receive deliveries from other outlets or buy directly from the franchisor.

Ask specifically about:

• Orders through the brand’s website and app.
• Deliveries through third-party platforms.
• Sales to corporate customers or bulk purchases.
• Temporary kiosks, events, catering and mobile sales vehicles.
• Branded products sold through supermarkets or distributors.

For each channel, establish who receives the order, who supplies the products and who receives the revenue. If you are required to fulfil centrally placed orders, check how you will be paid and who bears the costs of packaging, promotions, delivery and refunds.

For example, your territory may be protected against new outlets but not against deliveries from a neighbouring outlet. That does not necessarily make the offer unsuitable. However, your sales forecasts need to account for that competition, rather than assume that all local customers will buy from you.

4. Identify conditions that could reduce your protection

Exclusivity may depend on sales targets, opening hours, the opening of additional outlets or compliance with particular standards. Read what happens if targets are not met: do you lose exclusivity, does your territory shrink, or can other operators enter it?

Ask for verifiable performance measures. Terms such as “satisfactory performance” need to be clarified through assessment criteria, measurement periods and the records used.

Also check the process that must be followed before your rights can change. Will you receive written notice? Will you have an opportunity to put matters right or challenge the calculations? How will disruption beyond your control, such as access to your premises being closed, be assessed?

Distinguish between negotiable terms and applicable legal protections. Your lawyer should assess these clauses in the context of the entire agreement; losing exclusivity is not necessarily the same as termination of the franchise.

5. Record what has been agreed before signing

Create a simple table with four columns: issue, franchisor’s promise, relevant clause and outstanding points. Include boundaries, sales channels, exclusions, performance targets and the process for changing the territory.

Ask for all important commitments to be included in the agreement or in an appendix that forms part of it. Keep marketing materials and correspondence, but do not assume they replace clear contractual protection.

If answers remain vague, postpone financial commitments that would be difficult to recover until their implications have been reviewed. Territory rights should support your business plan, not merely provide an attractive phrase in a sales presentation.

Practical step: before buying, make sure you can point to the protected area on a map, list the excluded sales channels and explain the circumstances that could change your rights.