Buying a Franchise in Malaysia: Check the Franchisor’s Audit Rights

Before buying a franchise in Malaysia, check how the franchisor can audit your outlet. Inspections help maintain quality across the franchise network, but overly broad clauses can create costs, disrupt operations and allow access to unrelated records. Focus your review on four points: what can be inspected, how inspections are conducted, who pays and how findings can be challenged.

1. Identify the basis and scope of inspections

Malaysia regulates franchises through the Franchise Act 1998, as amended, including the 2020 amendments. Official registration guidance lists disclosure documents, a sample franchise agreement, an operations manual and a training manual among the documents required for a registration application.

However, the existence of these documents does not mean that every brand has the same audit rights. Distinguish legal requirements from inspection powers granted by the contract. Do not accept an explanation that an audit requirement is “mandatory” without asking for the relevant statutory provision or contractual clause.

Under Section 15 of the Franchise Act 1998, the franchisor must provide the disclosure documents and a copy of the franchise agreement at least 10 days before the agreement is signed. Use this time to compare the audit clauses with the inspection procedures referred to in the manuals.

Ask the franchisor to clarify whether inspections cover:

• product quality, hygiene and compliance with brand standards;
• sales records, inventory and payments to the franchisor;
• training records and staff qualifications;
• specific financial documents or bank accounts;
• CCTV footage and customer information.

Avoid open-ended phrases such as “all records required” unless their limits are explained. If your company has other business activities, ask for access to be restricted to records relating to the franchise, subject to applicable legal requirements.

2. Establish inspection procedures and information safeguards

Scheduled audits and unannounced inspections have different implications. Quality inspections may need to capture day-to-day operations as they really are, whereas financial reviews usually require staff to prepare documents. Ask when notice will be given, who may attend and how long inspections typically last.

Request a sample checklist and anonymised inspection reports. These will help you assess whether compliance criteria are clear enough to apply in practice, rather than relying solely on an inspector’s opinion.

Points worth clarifying in writing include:

• visiting hours and procedures for accessing restricted areas;
• evidence that external inspectors have been formally appointed;
• rules for taking photographs, copying documents or collecting samples;
• who receives reports and how long records are retained;
• measures to protect confidential commercial information.

If access involves customers’ or employees’ personal data, also check compliance with the Personal Data Protection Act 2010, as amended, as applicable to the processing involved. Contractual permission to audit is not a reason to share all data without assessing the purpose, security arrangements and data protection obligations.

For example, ask whether sales reports without customer identifiers would be sufficient. Do not hand over an entire database simply because it is easier than preparing a tailored report.

3. Calculate audit costs, not just inspectors’ fees

The true cost may include time spent preparing records, overtime, inspectors’ travel, laboratory testing or repeat inspections. These costs will not necessarily all be charged; the question is whether the contract permits them and how the amounts are calculated.

Distinguish between three situations: routine inspections, inspections prompted by suspected non-compliance and follow-up inspections after corrective action. Ask who bears the costs in each case.

If the franchisee must pay when discrepancies are found in the records, make sure the trigger for payment is clearly defined. Is any minor discrepancy enough? How are errors in transaction recording dates, returned goods or cancelled sales handled? Does the franchisee have an opportunity to reconcile the records before costs are charged?

Prepare an internal estimate that accounts for staff time, an accountant’s assistance and potential operational disruption. Obtain actual quotations if external support is needed, rather than assuming an audit can be absorbed at no cost.

Propose reasonable arrangements, such as itemised charges, evidence of expenses and prior agreement for certain additional work. These are points to negotiate, not automatic rights you can assume exist without reading the agreement.

4. Ensure findings can be reviewed and problems corrected

An inspection report should enable you to understand the issues and the action required. Ask whether each finding will specify the evidence, the standard applied and the deadline for corrective action.

Distinguish issues requiring immediate action, such as safety risks, from administrative errors that can be corrected through a planned process. Ask for a procedure explaining how to submit evidence of corrective action and who confirms that a finding has been resolved.

Also check how you can respond to an inaccurate report. Is a review by another officer available? Can additional documents be submitted before charges are imposed or action is taken under the contract? Do not assume that signing a site visit form merely confirms attendance if its wording also indicates acceptance of all findings.

Before signing the agreement, prepare a one-page summary of access rights, notice requirements, costs and the corrective action process. Ask a lawyer to review any discrepancies between that summary and the contractual documents.

Practical takeaway: choose audit arrangements that protect brand standards without granting vaguely defined powers. Make sure you know what will be inspected, what you will have to pay and how to respond to findings before making a commitment.