Buying a Franchise in Malaysia: Check the Royalty Formula

A low royalty rate does not necessarily mean lower payments. The actual amount depends on how sales are defined, which deductions are allowed, minimum payments and when calculations are made. Before entering Malaysia’s franchise market, make sure you can calculate the royalties yourself using sample transaction records. This guide focuses on one essential check: what exactly will your royalty payments be based on?

1. Identify the calculation basis, not just the rate

Start by finding all the royalty clauses in the agreement and its fee schedule. Do not rely on an offer summary that only states a percentage. Ask the franchisor to show you the definitions of terms such as “gross sales”, “revenue” or “net sales” used in the formula.

These terms must be read as defined in the contract, rather than according to everyday usage or how an accountant prepares a profit statement. “Net sales”, for example, does not necessarily mean the amount remaining after all business costs have been deducted.

Prepare a checklist covering the following:

• Taxes collected: Are these included in the royalty calculation or excluded?
• Returns and refunds: When are their values deducted from sales?
• Cancelled orders: Do cancelled transactions still appear in the initial report?
• Sales through delivery platforms: Are royalties calculated before or after the platform’s commission?
• Credit sales: Are royalties payable before the customer’s payment is received?
• Additional charges: Are delivery or service charges included in the calculation?

For example, a platform may transfer money to an outlet after deducting its commission. If the contract uses the sales value before commission, royalties will not necessarily be calculated on the amount reaching your bank account. You need to factor this difference into your assessment of the costs of joining the brand.

2. Look for minimum royalties and triggers for changes

Once you understand the sales basis, check whether the contract sets a minimum royalty. If it does, establish whether that minimum replaces the percentage-based royalty when it is higher, or is charged in addition to it. Do not assume these two arrangements are the same.

Also ask when the obligation begins. Are royalties charged from the day the business starts serving customers, after a specified period, or from another date set out in the contract? The answer must be identifiable in the documents, not merely explained verbally.

Look out for circumstances that could change the amount payable:

• An initial royalty waiver with an expiry date.
• Tiered rates when sales reach specified thresholds.
• Minimum royalties that increase with each year of the contract.
• Fixed payments even when the outlet is temporarily closed.
• Different calculations for particular sales channels.

If tiered rates apply, ask whether the new rate applies to all sales or only to the portion above the threshold. This difference in method can change the amount you have to pay.

These are all points to check or negotiate, not assumptions that every franchise imposes the same terms. Compare brands using the complete formula, rather than the percentage advertised in marketing materials.

3. Test the formula over one transaction cycle

Ask the franchisor to provide a written worked example using fictional transactions or anonymised records. You do not need actual customer details to test the formula.

Create a worksheet showing transaction values, permitted exclusions, the royalty calculation basis, the applicable rate and the final amount. Prepare separate calculations for direct sales, platform sales and sales that are subsequently returned.

Then test three scenarios: normal sales, low sales that might trigger the minimum royalty, and a month with a high volume of refunds. The aim is not to forecast income, but to ensure that the calculation method produces consistent results.

Also check the reporting cut-off and payment dates. If a refund occurs after that month’s royalty has been paid, is an adjustment made the following month? What documentation is required, and what is the deadline for submitting a correction request?

Ask for the procedure to follow when sales system reports differ from royalty invoices. Identify who handles queries, how corrections are recorded and how disputed amounts are treated. Do not assume you can unilaterally withhold payment; first obtain legal advice on your contractual obligations.

4. Make sure the formula matches the legal documents

Malaysia regulates the franchise sector through the Franchise Act 1998, as amended, including the 2020 amendments, and related regulations. Official registration guidance lists the disclosure document and a sample franchise agreement among the documents required for a registration application.

Under Section 15, the franchisor must provide the prospective franchisee with the franchise agreement and disclosure document at least 10 days before the agreement is signed. Use this review period to compare the royalty formula in the agreement, fee schedule and disclosure document.

If there are discrepancies, request written clarification and corrections before signing. Official guidance on disclosure documents also states that amendments to the information in those documents require the Registrar’s approval under Section 11. Do not therefore assume that an email from a salesperson alone resolves inconsistencies between documents.

Ask a lawyer to review the contract wording and an accountant to verify the calculations. These checks serve different but complementary purposes: one clarifies your obligations, while the other shows their effect on costs.

Practical step: Before buying, make sure you have a clear royalty formula, a written worked example and an agreed adjustment procedure. If the amount payable still depends on interpretation, resolve that ambiguity first.