Buying a Franchise in Malaysia: Check Minimum Sales Targets

Sales targets in a franchise presentation may simply be projections, but figures in the agreement can become binding obligations. Before entering Malaysia’s franchise market, establish whether you must achieve a specified level of sales, how performance is measured and what happens if you miss the target. An appealing brand does not necessarily offer targets suited to your outlet’s capacity.

1. Distinguish projections from contractual obligations

Start by gathering every document that mentions performance targets: the business proposal, disclosure documents, draft agreement, target schedules and relevant sections of the operations manual. Do not look only for the term “minimum sales”. Similar obligations may appear as “minimum performance”, “revenue quotas” or “performance indicators”.

Classify each figure into one of three categories:

• Projection: an estimate to support planning, not a guarantee of results.
• Management target: a benchmark for performance discussions and improvement measures.
• Contractual obligation: a level that must be achieved, with specified consequences for failure.

Ask the franchisor to confirm the applicable category in writing. If a sales representative says the target is “only a guide” but the agreement lists failure to achieve it as a breach, resolve that discrepancy before signing.

Also check whether the obligation applies to a single outlet or your business as a whole. The combined performance of several outlets can conceal a shortfall at one location, while the contract may assess each outlet separately. Do not assume that sales above target in one month can offset a shortfall in another unless there is an explicit provision allowing this.

2. Make sure the formula and measurement period are clear

The term “sales” does not necessarily mean the same thing in every document. Ask for a worked example using hypothetical transactions so you can see how compliance with the target is assessed, rather than relying on a general explanation.

Points to clarify include:

• Whether sales are calculated before or after discounts and refunds.
• How taxes, cancelled orders and unpaid transactions are treated.
• How delivery orders or sales through central channels are allocated to outlets.
• Whether platform commissions are deducted when measuring performance.
• Which records take precedence if system reports differ from the money received.

Also distinguish total sales from profit. An outlet can meet its revenue target yet still make a loss if the cost of generating those sales is too high. Contractual targets should therefore be tested against actual margins, rather than assessed solely on customer numbers.

The measurement period is just as important as the formula. Does the target apply from opening day, after an initial settling-in period or from the start of the calendar year? How are partial months of trading treated? If performance is measured annually, make sure a shorter first year is not quietly subject to a full year’s target.

Establish who can increase the target, when changes take effect and the basis for those changes. Automatic increases that take no account of an outlet’s circumstances deserve careful scrutiny.

3. Test achievability using comparable evidence

Ask how the target was set. Is it based on the performance of established outlets, new outlets or the average across the network? Figures from a flagship outlet in a shopping centre may not be appropriate for a newly opened neighbourhood shop.

If the franchisor can provide suitable data, ask for an anonymised summary grouped by how long outlets have been operating and by location type. Look at the range of results, not just examples from the best-performing outlets. If detailed data is unavailable, record that limitation in your assessment; do not fill the gaps with optimistic assumptions.

Translate the target into daily activity:

Required daily sales = target for the period ÷ number of trading days.

Then divide daily sales by the estimated average transaction value to estimate the number of transactions required. Test whether the premises’ capacity, staffing levels and opening hours can support that volume. Base transaction estimates on reasonable evidence, not figures chosen simply to make the calculation work.

Prepare lower-sales scenarios and record the shortfall against the target. The aim is not to predict results precisely, but to identify whether even a small fall in demand could put you in breach of contract.

4. Check the consequences of failure and opportunities to remedy it

Malaysia regulates franchising through the Franchise Act 1998 [Act 590], as amended, including the 2020 amendments. Under Section 15, the franchisor must provide disclosure documents and a copy of the agreement to a prospective franchisee at least 10 days before the agreement is signed. Use this period to review performance obligations with a lawyer familiar with franchising.

Do not assume that a sales target is a figure required by law simply because it appears in the contract. Distinguish the brand’s commercial terms from statutory requirements, and ask your lawyer to assess the validity and effect of the relevant clauses.

Ask whether a single missed target triggers action or whether action follows only repeated failures. Check notice requirements, opportunities to improve performance and any additional charges. If a payment is required for a sales shortfall, ask for its formula and contractual basis to be explained; do not assume that paying it necessarily remedies the breach.

Negotiate a performance review process, a written remedial plan and provisions covering mandatory closures or disruption beyond the outlet’s control. These specific protections need to be agreed and legally reviewed, rather than assumed to be automatic rights.

Practical takeaway: Before buying, prepare a one-page summary recording the target formula, evidence of achievability, measurement period and consequences of failure. Do not sign until all four are clear.