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

A well-known brand does not necessarily have a strong financial position. Before buying a franchise, assess whether the franchisor can fund its support team, sustain operations and meet its commitments to the network. In Malaysia’s franchise market, this check helps prospective franchisees distinguish healthy growth from expansion that depends on fees from new buyers.

1. Obtain statements for the relevant legal entity

Start with the company named as the franchisor in your agreement. The parent company’s or group’s financial statements may look strong, but they do not necessarily demonstrate the financial capacity of the company responsible for supporting you.

Malaysia specifically regulates franchising through the Franchise Act 1998, as amended, including the 2020 amendments. Official registration guidance lists copies of audited financial statements for the latest three years among the documents required for a registration application, alongside the disclosure document and a sample franchise agreement.

This requirement to submit documents to the Registrar should not be taken to mean that prospective buyers are entitled to every internal company record. For your due diligence, request the franchisor entity’s audited financial statements for the latest three years, including the notes to the accounts and the auditor’s report—not just the profit summaries in promotional materials.

Check the following:

• Do the company name and registration number match the party named in the agreement?
• Are the statements for the company itself, or are they consolidated accounts for the whole group?
• What is the financial year-end date, and how current is the information?
• Are all pages, notes and the auditor’s report included?

If considerable time has passed since the statement date, request up-to-date management information explaining any significant changes. Distinguish this information from audited figures. If documents are not provided, record what remains unverified; do not fill the gaps with optimistic assumptions.

2. Assess sources of profit and cash movements

A reported profit does not necessarily mean there is enough cash. A franchisor may have recognised revenue without yet receiving payment, or it may face substantial payment commitments in the near future.

With an accountant, compare three years of income statements, statements of financial position and cash flow statements. Look for trends rather than a single appealing figure. Is revenue growing while operating cash flow weakens? Are receivables increasing faster than sales? Are recurring losses eroding equity?

Then ask where the franchisor’s revenue comes from. Sources may include company-owned outlets, royalties, product supplies and initial franchise fees. These sources have different characteristics: opening fees are linked to new outlets, while royalties generally depend on activity within the existing network, as specified in the contracts.

The key question is whether the business can continue to function if new outlet openings slow down. Ask how support team and administrative costs would be covered in that situation.

Avoid treating any single financial ratio as a universal pass mark for every brand. Business models, collection periods and purchasing patterns vary. Use the figures to develop specific questions, then assess the answers against the evidence.

3. Read the auditor’s report and notes to the accounts

Do not stop at the net profit figure. The auditor’s report and notes to the accounts can explain risks that are not apparent on the summary pages.

Ask an accountant to explain any modified audit opinion, emphasis of matter or disclosure of material uncertainty relating to going concern. These terms have specific meanings. Their presence does not justify an immediate conclusion that the company will fail, but it does call for further explanation.

Conversely, an unmodified audit opinion does not guarantee that the franchisor will always have sufficient cash or fulfil every commercial promise.

Also pay attention to:

• Borrowings and repayment schedules: what major obligations are due to mature?
• Related-party transactions: have substantial funds been lent to other companies within the group?
• Contingent liabilities: are there disputes or claims that could affect the company’s finances?
• Events after the reporting date: have circumstances changed since the financial year ended?

If the franchisor says its parent company will provide assistance, ask for evidence of what that support involves. Distinguish an intention to provide support from a legally effective written commitment; seek a lawyer’s review if your purchase decision depends on it.

4. Turn your findings into a purchase decision

Prepare a short list with three columns: findings, the franchisor’s explanation and supporting evidence. For example, if operating cash flow is negative, ask why, whether this is a recurring situation and how operations are being funded while the business awaits a recovery.

Check that the answers are backed by a credible plan. An explanation that expansion is putting pressure on cash needs to be supported by information about funding and payment commitments, not simply targets for new openings.

Under Section 15 of the Franchise Act 1998, the franchisor must provide the disclosure document and a copy of the franchise agreement to a prospective franchisee at least 10 days before the agreement is signed. Plan your financial review early so that this period is not spent merely gathering documents.

Base your decision on what can be verified: proceed, request further clarification or postpone the purchase. Franchise registration and a financial audit are not substitutes for your own risk assessment.

Practical takeaway: before buying, make sure you understand who holds the funds, how the franchisor generates cash and whether it can continue supporting the network without relying on an influx of new franchisees.