Buying a Franchise in Malaysia: Check the Franchisor’s Financial Health

Before buying a franchise, do not just assess your outlet’s ability to make a profit. Assess whether the franchisor can keep operating, pay suppliers and maintain the systems used across the network. Cash problems at franchisor level can affect many franchisees at once. Financial health checks help you distinguish brands growing sustainably from those dependent on money from new franchise buyers.

1. Make sure the accounts belong to the right entity

Start with the company name and registration number in the draft agreement. Match these details against the financial statements provided. The brand name on the sign may differ from the company that receives fees, owns the trade mark or supplies goods.

Ask for an explanation of the group structure if several companies are involved. Strong parent company accounts do not necessarily mean that the company signing the agreement has enough cash. Similarly, financial assistance from shareholders is no guarantee of continued support unless there is a commitment you can assess.

Malaysia has specific legislation: the Franchise Act 1998 [Act 590], as amended, including the 2020 amendments. Government registration guidance lists audited financial statements for the latest three years among the documents required for a registration application. However, the requirement to submit documents to the Registrar does not mean prospective franchisees have unrestricted access to all internal records.

Section 15 also requires the franchisor to provide the franchise agreement and disclosure documents at least 10 days before the agreement is signed. Use this review period to request the relevant accounts and seek explanations, rather than simply reading the headline figures.

2. Read profits alongside cash flow and debt

Ask an independent accountant to examine the audited financial statements, notes to the accounts and auditor’s report. If considerable time has passed since the last financial year-end, request recent management accounts as supplementary information. Management accounts are usually unaudited, so do not place the same level of confidence in them.

Focus on four areas:

• Operating profit: Does the core business generate a profit, or do profits come from asset sales and one-off income?
• Operating cash flow: Is cash actually coming in from normal business activities, or are profits still tied up in unpaid customer debts?
• Current liabilities: Are cash and readily realisable assets sufficient to meet short-term payments?
• Borrowings and commitments: When do debts fall due, and does repayment depend on new financing?

Also examine related-party balances. Substantial sums lent to other companies in the group may not be available when the franchisor needs them. Equally, you need to understand the repayment dates and terms of any large shareholder loans.

Do not use a single ratio as a pass-or-fail test for every brand. Financial patterns vary by business model. What matters is the direction of change, the reasons behind it and evidence that the franchisor can meet its obligations.

3. Test dependence on new franchise sales

A franchisor may earn income from initial fees, royalties, sales of supplies and its own outlets. Ask for a breakdown of revenue sources and an explanation of how that revenue is recognised in the accounts.

The key question is: If no new franchisees joined the network for a period, could the franchisor continue funding its normal operations? This is not a prediction that growth will stop, but a test of the financial model’s resilience.

For example, profits may appear to rise because substantial initial fees are received during a period of rapid outlet openings. Yet some of that money may be needed for training, opening support and other work still to be completed. Ask whether the costs of fulfilling those commitments have already been taken into account.

Also check whether revenue growth is matched by cash collections. Royalties recorded in the accounts but left unpaid by many franchisees may indicate pressure across the network. Seek an explanation of the age of outstanding receivables and provisions for doubtful debts, without requesting other franchisees’ identities or confidential information.

Compare management’s answers with the notes to the accounts. Shifting explanations or a reluctance to explain material discrepancies should make you more cautious.

4. Establish what evidence you need before deciding

Prepare a written list of issues to discuss with your accountant and solicitor. Distinguish between matters supported by evidence, those explained only verbally and those that remain unanswered.

Signs that warrant further investigation include:

• recurring losses alongside negative operating cash flow;
• an auditor’s report raising material uncertainty about the business’s ability to continue as a going concern;
• substantial overdue payments or disputes with key suppliers;
• dependence on funding injections that have not yet been finalised;
• accounts that do not match the entity named in the agreement.

These signs do not automatically prove that a brand will fail. Ask for a recovery plan, financing documents or relevant evidence of payment. If access to information is restricted on confidentiality grounds, suggest a review by your advisers under a confidentiality agreement. If significant uncertainties remain unresolved, postpone your decision.

Practical takeaway: Do not buy on the strength of paper profits alone. Verify the entity, examine cash and debt, then test whether the franchisor can survive without relying on new franchise buyers.