Buying a Franchise in Malaysia: Check Mandatory Supply Costs

The initial package price does not reveal the full cost of buying a franchise. Raw materials, packaging and other items that must be purchased from specified suppliers can determine whether each sale is genuinely profitable. In Malaysia’s franchise sector, standardised supplies help maintain brand quality, but prospective franchisees need to understand the costs and risks that come with these obligations before signing an agreement.

1. Map out all mandatory purchases

Start by requesting a complete list of goods and services that must be purchased from the franchisor or approved suppliers. Do not limit your review to the main products. Cups, labels, uniforms, cleaning materials and ordering software may also be mandatory purchases.

Divide the list into three categories: purchases required from a single source, purchases from a choice of approved suppliers, and purchases from any supplier provided they meet the specifications. These distinctions show how much scope you have to manage costs without breaching brand standards.

For each item, record:

• The supplier’s name and the party issuing the invoice.
• The current price and the date the price list takes effect.
• The minimum order quantity and pack size.
• Delivery, storage or handling charges.
• Payment terms, shelf life and returns conditions.

Also ask for a list of seasonal or promotional purchases. Special-edition stock that you are required to order may no longer be saleable once a campaign ends. Establish who bears the cost of leftover stock rather than assuming the franchisor will buy it back.

2. Calculate the true cost of each sale

The catalogue price is not necessarily the true cost of the goods you use. When assessing a menu item or product, include every mandatory component, along with packaging, delivery and a reasonable allowance for wastage based on operational evidence.

Use this simple calculation as a starting point:

Supply cost per saleable unit = total relevant supply costs ÷ number of units that can actually be sold.

If some stock is damaged, expires or is used for mandatory samples, the number of saleable units falls. The true cost per unit can therefore rise even if the supplier’s prices remain unchanged.

With permission from the relevant parties, request sample invoices and usage records from outlets with a comparable format and location. Compare those records with standard recipes or product specifications. Significant discrepancies need to be explained, rather than immediately attributed to operator negligence.

Test three scenarios: current prices, rising supply prices, and slower sales that leave you with excess stock because of minimum order requirements. Base the changes on historical prices or actual quotations, rather than assuming margins will always remain stable.

Distinguish the amount left after supply costs from net profit. That balance still needs to cover wages, utilities, rent and other contractual payments. The aim of this review is to establish whether the supply arrangements leave reasonable room for the business to operate.

3. Check the contract’s supply provisions

Malaysia has specific legislation, the Franchise Act 1998, which has been amended, including through amendments in 2020. The Act applies to the sale of franchises throughout Malaysia. Section 30(2) provides for the payment of franchise fees, royalties, promotional fees or other payments as stipulated in the franchise agreement.

However, do not assume that the existence of this legislation makes every supply price or purchasing condition favourable to franchisees. Your actual commercial obligations need to be assessed by reading the agreement alongside the price schedules and operating documents referred to in the contract. The Contracts Act 1950 is also relevant to contractual matters generally.

Ask a solicitor to review the following:

• Price changes: Who can increase prices, how are changes determined, and is advance notice required?
• Specification changes: Could a change in packaging or equipment make existing stock unusable?
• Minimum orders: Are quantities fixed, or can they change at the supplier’s discretion?
• Alternative supplies: What is the approval process if the main supplier fails to deliver?
• Quality disputes: How are defective goods rejected, replaced or credited?

Proposals such as price-change notice periods and approval for alternative suppliers are matters for negotiation; do not assume they are all automatic legal rights. Make sure important commitments are recorded in binding documents, not merely in messages from a salesperson.

4. Verify the ordering experience before deciding

Speak to several existing franchisees, rather than relying solely on showcase outlets. Ask about late deliveries, stock shortages, invoice accuracy and how long it takes to receive credit notes. Request specific examples without asking them to disclose confidential information.

Work through a practical scenario with the franchisor: a key ingredient runs out just before the weekend, but customer orders have already been accepted. Who should you contact? Are emergency purchases allowed? Who approves a substitute, and how long does the process take? These answers help you assess the risk of lost sales and breaches of brand standards.

Before committing, prepare a one-page summary setting out mandatory purchases, unit costs, minimum orders, price-change arrangements and remedies for supply failures. Flag anything that has not yet been confirmed. If important costs are explained only verbally, or the supplier can change terms without explanation, postpone your decision until the risks are clear.

Practical step: Do not assess a brand on its package price alone. Cross-check the mandatory supply list against actual invoices and contract clauses, then make sure margins remain reasonable when prices change or stock sells slowly.