Buying a Franchise in Malaysia: Check Mandatory Upgrade Costs

The opening package price is not necessarily the total amount you will need to invest in your franchise premises. Once the outlet is operating, the franchisor may require design changes, replacement machinery or new systems. In Malaysia’s franchise sector, updating standards can help maintain the customer experience. However, before committing, buyers need to know who decides on changes, who pays and how the expenditure is approved.

1. Identify all upgrade obligations

Do not limit your review to the equipment list in the start-up package. Look for clauses covering periodic refurbishment, brand identity, maintenance, asset replacement, technology systems and compliance with the operations manual. Spending obligations may be spread across several documents rather than presented as a single fee.

Distinguish between three categories. Maintenance keeps existing assets working. Replacement involves assets that are damaged or no longer fit for use. Brand upgrades, meanwhile, may be required even when the equipment and décor are still in good condition. This distinction matters because the triggers for expenditure and the scope for negotiation differ.

Ask the franchisor for a written list answering the following questions:

• Which assets or parts of the premises could you be required to replace or alter?
• Are changes driven by a schedule, the condition of the assets or the franchisor’s decision?
• Are new outlets exempt from an imminent refurbishment programme?
• Who owns the old equipment, and can it be sold or reused?

Also ask for examples of previous upgrade instructions and their cost breakdowns. Past experience is no guarantee of future costs, but it can help you understand how the brand implements changes.

2. Check the franchisor’s contractual powers

Malaysia has specific legislation, the Franchise Act 1998 [Act 590], which has been amended, including through amendments in 2020. Section 18 requires franchise agreements to be in writing and to contain certain information, including the parties’ responsibilities. Financial obligations relating to changes to the premises should therefore be assessed in the context of the entire agreement, rather than relying solely on a salesperson’s explanation.

Watch for wording such as “in accordance with current standards” or “as directed from time to time”. Read such wording alongside any clauses allowing the operations manual to be amended. The key question is whether changes to the manual can impose substantial expenditure without your specific agreement.

Section 25 provides that the franchise term must be at least five years. However, this minimum term is not a guarantee that the premises will be exempt from mandatory upgrades, or that you will recover any additional investment before the contract expires.

Ask an independent lawyer to assess the relationship between the power to change standards, the obligation to pay and the consequences of non-compliance. If the franchisor’s explanation limits your obligations, ask for those limits to be included in the agreement or a signed written addendum. Do not assume that an explanatory email necessarily overrides the contract.

3. Calculate the full cost, not just the price of the work

A contractor’s quotation rarely reflects the full burden of an upgrade. The outlet may need to close temporarily, stock may have to be moved and staff will still need to be paid. New equipment may also require training, maintenance or additional software subscriptions.

Prepare a cost sheet with four categories:

• Physical work: design, materials, installation, wiring and disposal of old assets.
• Implementation requirements: relevant permits or approvals, inspections and insurance cover during the work.
• Operational disruption: fixed costs during closure and lost sales contribution after allowing for savings in variable costs.
• Ongoing costs after completion: software licences, training, servicing and increased utility consumption.

Do not treat lost sales as lost profit; they are different. Ask an accountant to help ensure that your estimate of operational disruption does not double-count costs.

Then model upgrade scenarios early, midway through and late in the contract term. This is not a prediction that the work will definitely take place. The aim is to assess whether the remaining operating period offers a reasonable opportunity to recover the additional investment. If finance is needed, check which expenditure is eligible, when funds can be drawn down and the repayment period with the lender before assuming a loan will be available.

4. Negotiate a clear process before buying

The aim of negotiation is not necessarily to prohibit all changes. Brands need consistent standards, but franchisees need a process that allows them to plan for costs. Propose reasonable written notice, a detailed scope of work and an opportunity to assess quotations before work begins.

Discuss whether the contract could include spending limits, phased implementation or a special review when instructions are issued close to the contract’s expiry date. Distinguish urgent changes relating to safety or legal compliance from cosmetic changes that may allow more flexibility in timing. These are all points to negotiate, not automatic rights you can assume are available.

Ask several existing franchisees whether actual costs differed from estimates, how long operations were disrupted and how objections were handled. Use their answers to develop further questions, not as a substitute for the contract documents.

Practical takeaway: Before buying, get three things in writing: what triggers an upgrade, how its cost is determined and how it will be implemented. If your obligations are open-ended but your financial capacity is limited, resolve that gap before signing.