Buying a Franchise in Malaysia: Check Promotional Fund Transparency

Promotional fees may look modest in a franchise offer, but these recurring payments can become a substantial commitment over the life of the contract. Before joining a franchise network in Malaysia, do more than ask how much you will pay. Find out who manages the money, how its use is reported and whether you will still need to fund your own marketing. These checks help distinguish your contribution to the shared brand from the cost of attracting customers to your outlet.

1. Understand the legal safeguards for promotional funds

Malaysia has specific legislation, the Franchise Act 1998, which has been amended, including in 2020. For prospective franchisees required to pay promotional fees, Sections 22 and 23 are important provisions to discuss with a lawyer before signing the contract.

Section 22 requires franchisors that charge promotional fees to establish a promotional fund. The money must be held in a separate account and used only to promote products under the franchise concerned. Section 23 requires the promotional fee rate to be stated in the franchise agreement.

These provisions do not guarantee that every outlet will receive the same advertising spend or achieve a particular sales return. Brand campaigns can benefit the wider network, while their impact on individual locations varies according to local customers and competition.

Distinguish legal obligations from additional rights you want to negotiate. Do not assume you automatically have access to spending breakdowns by outlet, marketing meetings or prior approval of particular campaigns. Ask your lawyer to identify what the Act covers and what needs to be clarified in the contract.

2. Ask for evidence of fund management, not just advertising examples

Attractive campaign images show creative output, but not how franchisees’ money is managed. Ask for a written explanation of the promotional fund account, the spending approval process and the reporting provided to existing franchisees.

Useful materials to request include:

• A summary of contributions, expenditure and the fund balance for previous periods.
• A sample fund report circulated to franchisees.
• The current marketing budget and campaign calendar.
• Policies on unspent balances and how funding shortfalls are covered.
• An explanation of who reviews or audits the fund’s accounts.

If detailed information is considered confidential, suggest documents with sensitive information redacted or a review session with your adviser. Refusal to share a particular document is not, in itself, evidence of wrongdoing, but persistent uncertainty should be resolved before you buy.

Also examine payments to agencies or companies related to the franchisor. Ask what services they provide, how charges are set and who approves payments. If administration costs or marketing staff costs are charged to the fund, ask for the basis for these charges and have your lawyer review whether they are consistent with the fund’s purpose under the Act.

3. Separate fund contributions from outlet marketing costs

One costly misunderstanding is assuming that promotional fees cover all marketing activity. Under some franchise offers, franchisees must still pay separately for launch campaigns, printed materials, local advertising and customer discounts.

Prepare a cost table with three columns: paid through the shared fund, paid by the outlet, and not yet clear. Place every activity proposed in the sales package in the appropriate column. Any item in the final column needs a written answer.

For example, a network-wide coupon campaign might use the shared fund for advertising, while the outlet bears the cost of the discount. Similarly, a delivery promotion may involve platform commissions and delivery subsidies that are not paid from the promotional fund. These examples are not standard requirements across all brands; they are points to verify.

Ask who decides whether an outlet participates. Can you opt out of a campaign that damages your margins, or is participation compulsory? Who pays for new promotional materials when a campaign changes? Use the answers to estimate your total marketing commitment, rather than just your fund contributions.

4. Make transparency part of your buying decision

Speak to several existing franchisees, including operators in locations similar to your proposed site. Ask whether reports arrive consistently, additional costs are explained in advance and questions about spending receive satisfactory answers.

Do not judge the fund solely on one successful or unsuccessful campaign. Look for patterns in its management: are plans explained, results measured and franchisee feedback considered? In a healthy franchise network, transparency helps build trust even when individual locations’ interests do not always align.

Before signing, ask for the contract to clarify reporting frequency, permitted categories of fund expenditure, the process for changing fees and the channels for raising disputes. Do not assume you can unilaterally stop paying if you are dissatisfied; seek legal advice on your obligations and the remedies available.

Practical next step: proceed with the purchase only once you can explain where your promotional fees go, how their use is reviewed and which additional marketing costs your outlet will still have to bear.