Buying a Franchise in Malaysia: Check the Term and Renewal Conditions

Buying a franchise means more than securing the right to open a shop. You are buying the right to operate a business for a set period, with the possibility of extending it under the applicable law and contract. In Malaysia’s franchise market, buyers need to distinguish between a guaranteed term and a renewal opportunity that remains conditional. This distinction matters when assessing whether the initial investment makes sense and how long the business can operate.

1. Distinguish the franchise term from the registration period

Malaysia has specific legislation governing franchises: the Franchise Act 1998 [Act 590], including amendments in force. Section 25 provides that the franchise term must be at least five years. However, this minimum term is not a promise that a franchisee can continue using the brand indefinitely or receive an automatic renewal.

The agreement’s term is also separate from the period for which registration remains valid. Under the Franchise (Prescription of Period of Effectiveness of Registration) Regulations 2022, registration for franchisors and master franchisees is valid for five years. Renewing registration is a compliance matter separate from renewing your contractual rights.

Do not accept explanations such as “the registration is still valid, so the contract will continue” without checking. Ask a solicitor to distinguish between the two and identify the dates relevant to your purchase.

Prepare a simple schedule recording:

• The date the agreement is signed.
• The date from which the franchise term is calculated.
• The expiry date of the initial term.
• The earliest and latest dates for applying for renewal.
• The extension period offered and the conditions for obtaining it.

This schedule helps you spot inconsistencies before you commit, rather than only when the contract is about to expire.

2. Establish when the term actually begins

The signing date, premises handover date and opening date may differ. If the contract calculates the term from the signing date, time spent obtaining approvals, fitting out the premises and attending training may reduce the shop’s actual operating period.

As a hypothetical example, the contract might begin when it is signed, but the shop may not open until several months later. Do not assume that this time will be added to the end of the contract. Check whether there are specific provisions covering delays and adjustments to dates.

Ask the franchisor three questions: what event starts the term, who confirms that event, and which document records it? If the answer is “the opening date”, make sure that term is clearly defined. A soft opening and an official opening may take place on different days.

Ask for the contract to explain how delays attributable to the franchisor, franchisee or regulatory approvals will be handled. Any proposed extension should be set out in writing, including the approval process and any fees. This is a matter for negotiation, not an automatic right to an extension that you should take for granted.

3. Turn renewal promises into conditions you can assess

The phrase “renewable” is not enough to support an investment decision. It may mean an option you can exercise once certain conditions are met, or merely an opportunity to submit an application for the franchisor’s consideration.

Read the renewal clause alongside the definitions, fee schedule and appendices. Identify whether approval depends on outstanding payments, compliance history, business performance or acceptance of a new contract. If the conditions refer only to “satisfactory performance”, ask for the benchmarks and assessment method to be explained.

Use the following questions in your discussions:

• Is renewal a contractual option, or is it subject to further approval?
• What evidence must accompany the application?
• Can compliance shortcomings be remedied before a decision is made?
• By when must the franchisor provide a written decision?
• Will the new term use the existing contract or a new version?

Section 32 of the Franchise Act 1998 also contains specific provisions on non-renewal of agreements. Do not therefore assume that discretion stated in the contract overrides all statutory protections. Ask a solicitor to assess the clause against current law and the circumstances of your offer.

When reviewing the brand’s track record, speak to franchisees who have been through renewal. Focus on the process, decision times and any differences between the written conditions and their implementation. Their experience can help you assess actual practice, but it does not replace the rights in your own contract.

4. Assess the purchase without assuming renewal is guaranteed

Separate your financial assessment into two scenarios: the business ends when the initial term expires, or it continues after renewal. The aim is not to predict rejection, but to avoid basing your purchase decision entirely on an extension that is not yet assured.

Ask for a written list of renewal fees, documentation costs and any other payments required to extend the contract. If the amounts have not yet been set, ask how they will be determined, who will decide them and when you will be informed. Do not use the initial franchise fee as an estimate of the renewal fee without a sound basis.

Also check whether a new contract could change your financial commitments. Note what is already certain and what remains open. If the investment only appears viable with several consecutive renewals, reconsider the purchase price or seek greater contractual certainty.

Practical action: Before signing, make sure you can answer three questions with documentary evidence: when your rights begin, when they end and what conditions apply to extending them. A verbal promise that renewal is “usually straightforward” is no substitute for written answers.