Buying a Franchise in Malaysia: Check the Resale Terms

Buying a franchise is not just about planning for opening day. You also need to know how to sell the business if your family circumstances, health or financial plans change. In Malaysia’s franchise market, incoming buyers usually have to meet the brand’s requirements before taking over operations. Before making a substantial financial commitment, check whether the agreement provides a clear, reasonable and workable route to transferring the business.

1. Distinguish between selling assets, selling shares and transferring franchise rights

Selling equipment and stock does not necessarily transfer the right to use the brand. Similarly, selling shares in the company that operates the outlet may trigger a change-of-control clause even if the company’s name stays the same.

Ask the franchisor to explain how the agreement treats these three situations:

• Asset sale: the buyer takes over equipment, stock and specified assets, but needs separate rights to continue operating the franchise.
• Share sale: ownership of the company changes, while the company remains a party to the agreement.
• Transfer of franchise rights: rights and obligations under the agreement are transferred through an agreed mechanism.

Do not assume that choosing a particular transaction structure will allow you to avoid obtaining the franchisor’s approval. Also check whether bringing in a partner, changing directors or transferring ownership to a family member requires consent.

This review should leave you with a simple outline: what can be sold, whose approval is needed and which documents must be signed.

2. Understand the contractual position under Malaysian law

Malaysia has specific franchise legislation: the Franchise Act 1998, which has been amended, including through amendments in 2020. Section 18 requires franchise agreements to be in writing and to contain certain provisions, including the conditions under which a franchisee may assign their rights under the franchise.

The requirement to state assignment conditions does not mean you are free to sell to anyone. Your actual rights must be considered alongside the agreement as a whole and the applicable legal provisions. The Contracts Act 1950 is also relevant to general contractual matters.

Section 15 requires the franchisor to provide the franchise agreement and disclosure documents at least ten days before the agreement is signed. Use this review period to compare explanations about transfers with the actual clauses, rather than simply accepting verbal assurances that the outlet will be “easy to sell”.

Ask your lawyer to identify whether the transaction will involve an assignment, the substitution of a party through novation, or a new franchise agreement. These mechanisms can have different effects on existing liabilities. Approval to sell does not, by itself, necessarily release you from all obligations.

3. Assess the approval process for an incoming buyer

Knowing that the buyer needs the franchisor’s approval is not enough to plan a sale. You need a process that is clear and workable.

Ask for written answers to the following questions:

• What financial standing, experience and involvement in day-to-day operations are required?
• Must the buyer attend training before final approval?
• Which documents are needed for an application to be considered complete?
• How long does the franchisor expect to take to assess a complete application?
• Will reasons for rejection be provided in writing?
• Does the franchisor have a right of first refusal, and how is it exercised?

Distinguish between a contractually agreed deadline and an administrative estimate. If there is no clear deadline for a decision, discuss the risk of the buyer withdrawing while waiting.

Also ask whether the buyer takes over the remaining term of the agreement or must sign a new contract. A short remaining term, changes to fees or refurbishment requirements can affect buyer interest and the sale price. Do not assume that the franchise term automatically starts again when ownership changes.

4. Calculate the net proceeds and ensure you are released from liabilities

The sale price is not the amount you will ultimately receive. Before buying a franchise, prepare an illustrative calculation of the net proceeds based on the contractual terms, without relying on optimistic assumptions about the sale price.

List potential deductions such as transfer fees, buyer training, outlet upgrades, legal fees, overdue payments and the repayment of outstanding finance. Distinguish between charges required by the contract and costs for which quotations are still needed. Check who bears each cost: the seller, the buyer or another party.

If equipment is financed or used as security, check what consent the finance provider requires before the assets can be sold. Nor should you assume that personal guarantees given to a bank, franchisor or supplier end simply because the buyer has taken over.

Prepare a checklist of conditions to be met before the sale is completed:

• Written approval has been obtained from the franchisor.
• Transfer or novation documents have been signed.
• Outstanding debts and overdue payments have been confirmed.
• Any necessary releases from guarantees have been obtained from the relevant parties.
• The handover date, stock count and allocation of liabilities have been agreed.

Discuss this checklist with your lawyer so that the sale contract does not promise a transfer you are not yet entitled to make. Keep all approvals together with records of payments made to settle outstanding amounts.

Practical takeaway: Before buying, make sure you can answer three questions: who can take over, how much will it cost to exit, and when will your liabilities actually end? A clear route to resale helps preserve your options throughout your time as a franchisee.