Buying a Franchise in Malaysia: Check Exclusive Territory Rights

The promise that an area is “yours” can influence your decision to buy a franchise. Yet the actual protection depends on how the agreement defines the territory, not simply the distance between outlets. Clear territorial boundaries help manage expectations between franchisors and franchisees. Before buying, make sure you understand who can sell, through which channels, and under what circumstances territorial protection can change.

1. Distinguish an operating area from exclusive rights

Approval for your business premises at a particular address does not necessarily give you exclusive rights over the surrounding area. Likewise, permission to market within a district does not necessarily prevent the franchisor from opening another outlet there.

Ask the franchisor to clarify whether the offer provides:

• The right to operate one outlet: you may trade only at a specified address.
• A marketing area: you may promote the business within a defined area.
• An exclusive territory: specified parties are restricted from carrying out certain activities within agreed boundaries.
• Priority to open new outlets: you get an early opportunity to consider a new location, but not necessarily the right to prevent others from opening there.

If the word “exclusive” is used, ask who is bound by it. Does the restriction on opening outlets cover the franchisor itself, other franchisees and related companies? Does protection apply only to the same store format, while allowing kiosks or smaller premises?

Ask for a map to be attached to the agreement. It should be supported by a written definition, such as a list of postcodes or boundaries marked by roads. If a radius is used, clarify the point from which it is measured and whether the distance is calculated in a straight line or by road. Avoid vague definitions such as “around the outlet”.

2. Test the exceptions for digital sales and special locations

Protection against a neighbouring outlet opening may be worth less if other channels are free to target the same customers. Check not only where the seller is located, but also where customers are based and how orders are allocated.

Ask how orders placed through the website, the brand’s app or delivery platforms are handled. Will customers within your territory be assigned to your outlet, the nearest outlet or another fulfilment centre? Who can change that allocation method?

Also check for exceptions covering airports, shopping centres, campuses, hospitals, petrol stations, mobile sales and temporary events. Exceptions are not necessarily unreasonable, but you need to understand their impact before assessing the franchise price.

Use a hypothetical example in discussions: your outlet has a defined territory, but the franchisor opens a kiosk in a supermarket within it. The kiosk accepts delivery orders from customers near your outlet. Are both activities permitted?

Ask for answers that refer to contractual clauses, rather than simply current practice. If you are promised a share of revenue from orders within your territory, make sure the calculation method, supporting records and payment schedule are also specified. Location exclusivity is not the same as exclusivity over customers or sales revenue.

3. Check protection against the documents and the law

Malaysia regulates franchising through the Franchise Act 1998, including amendments in force. Official registration guidance lists the Franchise Act 1998 with the 2020 amendments, alongside the relevant regulations. The Act applies throughout Malaysia to the sale of franchises within Malaysia.

According to official disclosure document guidance, Section 15 requires the franchise disclosure document approved by the Registrar to be provided to a prospective franchisee at least 10 days before the agreement is signed. Use that review period to compare the descriptions of the territory in the disclosure document, draft agreement and attached map.

Do not assume that franchise registration itself proves you have an exclusive territory. The scope of the rights offered still needs to be established from the relevant documents.

If the salesperson’s explanation differs from the contract, ask for the discrepancy to be resolved before signing. Official guidance also states that amendments to information in the disclosure document require the Registrar’s approval under Section 11. Do not therefore assume that a side letter alone will necessarily be sufficient to address every change to the offer.

Ask a lawyer familiar with franchising to check that the documents are consistent and that the necessary procedures are followed. The review should focus on your actual rights, their exceptions and how they can be enforced.

4. Identify when protection can change

Some offers link territorial protection to sales targets or particular compliance requirements. Distinguish exclusive rights that last for the full term of the agreement from conditional rights that can be reduced if targets are missed.

Check the following:

• How targets are set and whether the franchisor can change them.
• The period over which performance is measured and the records used.
• The notice given and opportunity to remedy shortcomings before the territory is changed.
• How temporary closures or operational disruption affect the assessment.
• The process for raising an objection if a new outlet is alleged to breach territorial boundaries.

Ask what action is available if territories overlap. Do not assume you can simply withhold royalties or stop operating; doing so could create other contractual issues.

Practical step: before buying, prepare a one-page summary of the territory map, the parties bound by the restrictions, the sales channels protected, the exceptions and the conditions under which protection can change. If any answer remains unclear in the documents, postpone your decision until the position has been confirmed.