Clearly Define Franchise Territory Rights in Malaysia

When an established business wants to build a franchise network, the key question is not simply where to open the first outlet. The owner needs to decide who can sell, through which channels and in which areas. Unclear territory rights can lead to disputes when new outlets open or online orders increase. This guide helps prospective franchisors develop a territory policy before seeking legal advice on their agreements.

1. Distinguish between premises and territory rights

A shop address does not, by itself, define a franchisee’s rights over the surrounding area. Permission to open premises in a shopping centre, for example, does not establish whether the franchisor can open a kiosk in the neighbouring building or appoint another franchisee within the same delivery area.

Start by choosing the level of protection you can realistically offer:

• Exclusive territory: specified rights are granted solely to that franchisee within agreed boundaries, subject to stated exceptions.
• Non-exclusive territory: the franchisee may operate within the area but may share the market with other outlets.
• Premises-based rights: permission relates to a specific location, with no promise of protection for the surrounding area.

These are commercial arrangements, not categories that automatically provide uniform legal protection. Avoid using the word “exclusive” in presentations if your own team cannot yet explain its limits.

Also list company-owned outlets, temporary kiosks and existing corporate customers. Decide whether these activities will continue as exceptions. Prospective franchisees need to understand this before assuming that all local demand belongs to them.

2. Draw boundaries based on evidence of demand

Do not grant an entire district simply because a candidate asks for a large area. Instead, use existing business records to understand where customers come from, how far they travel, delivery patterns and physical barriers such as motorways or rivers.

Sales data can help identify a catchment area, but it does not guarantee that another location will perform equally well. Distinguish repeat purchases by local residents from occasional sales to visitors from elsewhere. Use aggregated customer information when preparing territory analysis so that personal details are not disclosed unnecessarily.

Prepare a map with clearly identifiable boundaries. If using a radius, specify the centre point and measurement method: straight-line distance or travel distance. If using postcodes, check whether their coverage matches the actual market.

For each proposed territory, keep a decision sheet recording:

• the boundaries and proposed premises location;
• the evidence of demand and local competition;
• existing outlets and known opening plans;
• sales channels covered by or excluded from the protection;
• who approved the proposal.

The aim is not to draw the largest possible territory, but to define an area that can reasonably be supported without unnecessarily restricting the growth of the franchise network.

3. Clarify delivery and sales across channels

Physical outlet boundaries do not necessarily match digital sales boundaries. A customer may live in one franchisee’s territory but order from another outlet through a delivery app. Without rules in place from the outset, both franchisees may feel that their rights have been affected.

Create a simple table by channel: on-site sales, the central sales website, delivery apps, corporate orders and temporary events. For each channel, determine who receives the order, who fulfils it, and how the revenue and associated costs are allocated.

For example, a franchisor might propose allocating orders from the central website according to the delivery address, subject to outlet capacity. However, explain what happens when an outlet is closed, stock runs out or a customer chooses to collect from another location. This is an example of an operating policy, not a universal legal requirement.

Do not promise control you do not have. Third-party delivery platforms may change their coverage. Distinguish the franchisor’s obligation to manage settings within its control from platform decisions beyond its control.

4. Set out territory rights precisely in the agreement

Malaysia regulates franchising through the Franchise Act 1998, including relevant amendments. Section 18 requires franchise agreements to be in writing, and subsection 18(2) lists the territory rights granted to the franchisee among the matters that must be specified. This requirement does not mean that every franchisee automatically receives an exclusive territory.

Section 15(1) also requires the franchisor to provide the prospective franchisee with the franchise agreement and disclosure documents at least ten days before the agreement is signed. Use this period to explain the map, exceptions and examples of overlapping orders, rather than merely obtaining an acknowledgement that the documents have been received.

Ask a lawyer familiar with franchise law to review the boundaries, rights granted, exceptions and process for making changes. If territory protection is linked to performance, clearly specify the measures, data sources, assessment period and opportunities to remedy shortcomings. Do not assume that poor performance allows a territory to be withdrawn or an agreement to be terminated at will; the implications must be assessed under the Act and the agreement.

Also establish a complaints process for territory overlaps, specifying the evidence required and who makes the decision. Record decisions in writing to ensure franchisees are treated consistently.

Practical action: before promising an area, prepare a territory map, a table of rights by sales channel and a list of exceptions. Obtain legal review before including that promise in an offer or agreement.