Buying a Franchise in Malaysia: Check How Royalties Are Calculated

A low royalty rate does not necessarily make a franchise better value. The actual amount payable depends on how sales are defined, which deductions are allowed and what you must pay when business is slow. Before entering Malaysia’s franchise market, check how every ringgit of royalties is calculated. This guide helps prospective franchisees test the formula before signing an agreement, rather than simply accepting the figures in promotional materials.

1. Understand the royalty obligations in the agreement

Malaysia has specific legislation, the Franchise Act 1998, which has been amended, including in 2020. Section 30(2) provides that franchisees must pay franchise fees, royalties, promotion fees or other payments as stipulated in the franchise agreement.

This makes the wording of the contract particularly important. Do not assume that every brand uses the same calculation basis or that the rate quoted in a sales presentation explains your full financial obligations.

Ask the franchisor to identify the clauses setting out:

• The basis for calculating royalties and the applicable rate.
• When your payment obligations begin and when each payment falls due.
• Any minimum royalties, fixed payments or periodic adjustments.
• Late payment charges and the process for resolving calculation disputes.

Distinguish royalties from promotion fees, software subscriptions and mandatory supply purchases. These may be charged separately, even though they all relate to operating under the brand. Make sure you have not mistakenly assumed that any of them are included in the royalty.

2. Examine what “sales” means before comparing rates

Terms such as “gross sales”, “net sales” or “outlet revenue” are not sufficient without detailed definitions. Two brands with the same royalty rate can charge different amounts because they use different calculation bases.

Ask for written clarification on the following transactions:

• Discounts: Are royalties calculated on the original price or the discounted price?
• Refunds: Can refunded sales be deducted, and in which month?
• Delivery orders: Is the calculation based on the customer’s order value or the amount received after platform commission?
• Vouchers and reward points: When is the sale recognised, and how are redemptions recorded?
• Applicable taxes: Are amounts collected as tax included in the royalty calculation basis?
• Cancelled orders: How are incomplete transactions excluded from reports?

For illustration only, an order worth RM100 (100 Malaysian ringgit) might generate receipts of RM75 after platform deductions. If the contract uses the order value before deductions, the royalty calculation basis is RM100, not RM75. This is not a mandatory rate or practice; the answer depends on the contract.

Also check who funds promotions. A discount funded by the outlet may reduce your receipts without necessarily reducing the royalty calculation basis by the same amount.

3. Test the formula against three operating scenarios

Do not stop at a verbal explanation. Ask for a sample royalty statement with any confidential information about other outlets removed, then build your own spreadsheet using the draft contract.

Test at least three scenarios: a normal sales month, a month with a major promotion and a month when the outlet is temporarily closed. Use your own clearly stated assumptions, rather than treating projected profits as guaranteed.

For each scenario, work through the calculation in order: total transaction value, permitted adjustments, royalty calculation basis, royalty rate and any minimum payment. Keep other charges separate so you can see both the actual royalty and the total amount payable to the franchisor.

If there is a monthly minimum, check whether you pay the higher of the minimum and the sales-based royalty, or both. Do not make assumptions based on the word “minimum” alone.

Also ask how a partial first month, delayed opening, refurbishment and operational disruption are treated. Confirm whether any exemption requires written approval. This exercise helps you assess whether the brand is suitable when revenue falls, not just when the outlet meets its targets.

4. Check reporting, audits and rate changes

You should be able to verify royalties against transaction records. Identify which sales system is the official source of data, who can alter that data and how outlet reports are reconciled with the franchisor’s statements.

The agreement may give the franchisor the right to audit records. Check the scope of access, record retention period, audit notice requirements and who bears the cost if an underpayment is found. Make sure you also have a way to correct overcalculations and obtain adjustments or refunds under the contract.

Scrutinise any power to change the rate or calculation basis. Can changes take place only at renewal, according to a set schedule or by notice? Ask a lawyer to assess clauses that allow financial obligations to be changed through the operations manual, especially if its relationship with the agreement is unclear.

Before agreeing, ask for the agreed formula, sales definitions and worked examples to be included in the agreement or in an appendix that forms part of it. Keep the final version together with written clarification records; do not rely solely on sales messages.

Practical step: Choose a brand only once you can calculate a royalty statement yourself and explain every deduction. If the calculation basis is still unclear, postpone any commitment and have a lawyer and an accountant review it.