Buying a Franchise in Malaysia: Check an Existing Outlet’s Liabilities

Buying an established franchise outlet can give you access to an existing customer base, workforce and sales history. However, the purchase price may not represent the full cost you will have to bear. In Malaysia’s franchise market, buyers need to identify historical liabilities that may remain with the company or need to be settled so that operations can continue. This review centres on one question: what obligations are you actually taking on?

1. Distinguish between an asset purchase and a share purchase

Before discussing the price, ask the seller to explain the transaction structure in writing. Are you buying specific assets from the existing operator, or shares in the company that operates the outlet?

In a share purchase, the same company continues to exist. Its debts, contracts and potential claims generally remain with it even when its shareholders change. Your review must therefore go beyond the outlet’s performance: the company may have loans, guarantees or other operations that also carry risks.

In an asset purchase, the documents should list the assets being bought and the liabilities you have agreed to assume. However, do not assume that this structure automatically eliminates every risk. Contract transfers, employment matters and third-party claims require separate scrutiny.

Ask your solicitor to prepare a simple transaction map showing:

• The entity receiving the purchase payment.
• The assets or shares being transferred to the buyer.
• The debts remaining with the seller.
• The obligations being assumed by the buyer.
• The third-party consents required before completion.

Use this map to determine which documents need reviewing, rather than relying on an advert’s description of an “outlet takeover”.

2. Build a liability register from supporting evidence

Ask the seller to prepare a register of all outstanding amounts, including disputed items. Each entry should identify the creditor, the reason for payment, the relevant period, the due date and supporting documents.

Check at least the following categories:

• Franchisor: outstanding royalties, marketing contributions and other invoices.
• Suppliers: unpaid invoices, goods received but not yet invoiced, and outstanding orders.
• Employees: unpaid wages, expense claims, accrued leave and outstanding statutory contributions.
• Premises and utilities: rent, maintenance charges, bills and earlier claims for repairs.
• Tax and finance: outstanding tax, tax audit matters, loans and security interests relevant to the transaction.

Do not simply accept the seller’s internal statements. Match the figures against invoices, bank statements, payment records and confirmations from the relevant parties, with appropriate permission. An accountant can help identify expenses that have been incurred but not yet recorded.

For example, a supplier’s bill received after the takeover may relate to goods delivered before completion. Without a clear method of apportionment, the buyer and seller can easily end up disputing who should pay it.

3. Look for obligations that do not appear as debts

Outstanding creditor balances do not tell the whole story. The outlet may already have received customer payments for services not yet delivered, or have complaints that could lead to refunds and claims.

Ask for a list of paid bookings yet to be fulfilled, outstanding repair work, customer claims and letters of demand from other parties. Also check for unresolved breach notices or instructions from the franchisor to take corrective action.

For each item, answer three questions: who received the original payment, who must fulfil the obligation, and who will bear the cost after the takeover? If the buyer must provide the service while the seller retains all the earlier revenue, the purchase price may need adjusting.

Employment matters should not be settled through verbal assurances either. Seek advice on how the transaction structure affects employment contracts, continuity of service and employee rights. Do not assume that a change of ownership allows existing entitlements to be disregarded.

4. Link your review to legal requirements and completion

Malaysia’s franchise sector is specifically regulated by the Franchise Act 1998, including its 2020 amendments. Government registration guidance lists documents such as a disclosure document, a sample franchise agreement and audited financial statements as part of a registration application.

However, franchise registration does not confirm that an outlet being sold is debt-free. Nor do the franchisor’s financial statements replace a review of the seller company’s accounts or the records of the outlet concerned.

If the takeover involves a new franchise agreement, take Section 15 into account: the franchisor must provide the disclosure document and a copy of the agreement at least 10 days before the agreement is signed. Ask your solicitor to review the consent, registration and documentation requirements applicable to your takeover structure.

In the sale and purchase agreement, negotiate concrete mechanisms: evidence that specified debts have been settled, price adjustments based on actual outstanding balances, seller confirmations regarding disclosed liabilities, and indemnities for agreed historical liabilities. If part of the price is temporarily retained, specify the amount, who will hold the funds, the conditions for release and the claims procedure. These protections must be negotiated; they are not automatic buyer entitlements.

Practical takeaway: Do not pay on the strength of an asset list alone. Complete the liability register, verify the evidence and agree in writing who will pay each liability before completing the takeover.