Buying a Franchise in Malaysia: Check Your Multi-Outlet Commitments

Buying the rights to several outlets at once can look attractive, particularly when the fee per outlet is lower. But buying an opportunity to expand is not the same as committing to expansion. Before entering the franchise market through a multi-outlet package, establish whether you are acquiring an option to open additional outlets or taking on obligations that continue even if your first outlet has yet to find its feet.

1. Distinguish expansion rights from obligations to open

Ask the franchisor to show you the clauses that explain what the offer actually involves. Do not rely on phrases such as “expansion opportunity” in a sales presentation if the contract specifies a minimum number of outlets.

In practice, offers can take different forms:

• Expansion option: you can apply to open additional outlets, subject to certain conditions.
• Development commitment: you must open an agreed number of outlets according to a schedule.
• Priority rights: you are given the first opportunity, but must act within a specified period to retain it.

These labels do not guarantee any particular legal effect. The terms of the contract determine your actual obligations. Ask a solicitor to explain whether failing to exercise a right simply causes it to lapse, or also triggers payment demands and a breach of the agreement.

Also establish who will operate each outlet. The right to open several premises yourself does not necessarily include the right to appoint other franchisees. If your plans involve other operators, do not assume that a multi-outlet package allows this without an explicit provision and a separate compliance review.

2. Check the commitments against the documents provided

Malaysia regulates its franchise sector through the Franchise Act 1998, including the 2020 amendments, and related regulations. Government registration guidance lists the disclosure document, sample franchise agreement, operations manual and training manual among the documents required for a registration application.

Under Section 15 of the Franchise Act 1998, the franchisor must provide a prospective franchisee with the disclosure document and a copy of the franchise agreement at least 10 days before the agreement is signed. Use this time to review the entire package, not just the agreement for the first outlet.

Request every document that creates an expansion commitment: the development agreement, opening schedule, offer letter, fee schedules and the form of agreement to be used for subsequent outlets. A document’s title alone does not determine its legal status; ask a solicitor to assess how the documents work together.

Prepare a comparison checklist recording:

• the number of outlets you are required to open;
• the dates or triggers for each obligation;
• the fees payable at each stage;
• the conditions for approval of subsequent outlets;
• the consequences of missing targets.

If the disclosure document describes a single-outlet package but the offer letter requires you to open several outlets, ask for a written explanation. Do not assume that franchise registration means every variation of the commercial offer has been approved or is affordable for you.

3. Calculate the capital exposure across the whole package

A discount on initial fees does not necessarily reduce your overall risk. The greatest financial pressure may arise when you have to fund a second outlet before the first generates surplus cash that you can use.

Build a monthly cash flow forecast for every outlet you have committed to opening. Separate the capital needed to open each outlet, its operating expenses and shared management costs. Include the cost of an area supervisor, additional staff training and travel between outlets where relevant.

Then test a scenario in which the first outlet only covers its own costs. Can you meet your next commitment without drawing on money set aside for that outlet’s wages, supplier payments or emergency reserves?

Also check whether fees for future outlets are fixed now or will be charged at the prevailing rate when each new agreement is signed. If a development fee is payable upfront, ask for written confirmation of whether it will be credited towards individual outlet fees and what happens to any balance relating to outlets that never open.

Assess affordability against the total commitment, not the advertised package price. Do not treat future profits as funding that is already available.

4. Limit the impact of one outlet’s failure on the others

Watch for clauses that link all the agreements. Depending on the contract, a breach relating to one outlet may also be treated as a breach of the development agreement or the agreements for other outlets. This can turn a local problem into a risk to your entire investment.

Ask a solicitor to map out the consequences if you do not proceed with additional outlets. Would you lose only your expansion rights, or would your existing outlets also be affected? Could additional payments be demanded? Does each agreement have a separate process for remedying a breach?

Points you could negotiate include a performance review before further commitments take effect, an option to reduce the number of outlets by written agreement, and provisions separating the consequences of failing to expand from your right to operate existing outlets. These are negotiating proposals, not automatic legal rights.

Make sure important decisions do not depend on verbal assurances that the franchisor is “usually flexible”. The procedure for making changes should specify who must approve them, which documents are required and when the changes take effect.

Practical step: before signing, summarise the package on one page: the number of outlets you must open, the total capital required, the triggers for your commitments and the consequences of stopping expansion. If any of these four points remains unclear, resolve it before accepting the package.