Clearly Define Franchisees’ Territorial Rights in Malaysia

When an established business begins franchising, the key question is not simply where outlets will open, but who has the right to sell to customers in each area. Promises such as “this area is yours” can lead to disputes unless their meaning is clearly defined. Clear territorial rights help brand owners expand while maintaining confidence and good relationships across the franchise network.

1. Distinguish territorial rights from location approval

Location approval allows a franchisee to operate from specific premises. Territorial rights determine the commercial protection or freedom granted within an area. The two are not necessarily the same: approval for one shop does not automatically grant exclusive rights across an entire town or city.

In Malaysia, the Franchise Act 1998 (Act 590) governs franchise relationships. Section 18(1) requires franchise agreements to be in writing, while section 18(2)(b) requires the agreement to specify the territorial rights granted to the franchisee. The requirement to state those rights does not mean that every franchisee automatically receives an exclusive territory.

Before preparing the agreement, choose the type of rights that suits your business model:

• Exclusive territory: specified protection is granted within agreed boundaries, with its scope and exceptions clearly stated.
• Non-exclusive territory: the franchisee is permitted to operate, but has no guarantee that other outlets will not open nearby.
• Conditional exclusivity: protection depends on agreed conditions, such as meeting a schedule for opening additional outlets.

Do not rely on labels alone. Specify whether the protection prohibits other franchisees’ outlets, franchisor-owned outlets, or both. If a particular right is not being granted, explain this in plain language before the prospective franchisee makes a decision.

2. Draw identifiable boundaries

Avoid definitions such as “around the town centre” or “the area near the premises”. These are difficult to apply when new developments appear or two franchisees claim that the same customers fall within their respective territories.

Provide a map as an appendix, alongside a written description. Use verifiable boundaries, such as named roads, coordinates or precisely specified administrative areas. If using postcodes, check that their coverage actually matches the territory you intend to grant.

If boundaries are defined by a radius, clarify the centre point and method of measurement. Straight-line distance from the entrance to the premises is not the same as travel distance by road. Also specify which document takes precedence if the map and written description differ.

Before deciding on the size of a territory, assess customer density, travel times, delivery capabilities and outlet capacity. Use your own business’s operating data to test whether the territory can reasonably be served. An oversized territory can restrict expansion without providing any real benefit to customers.

Record existing outlets and locations where rights have already been granted to others. This check helps prevent overlapping rights from being granted before an offer is made to a new prospective franchisee.

3. Decide how to handle sales across territorial boundaries

Customers do not necessarily shop according to lines on a map. They may live in one area, work in another and place orders through the brand’s website. Territorial rights therefore need to explain how different sales channels will be managed.

For each channel, answer three questions: who receives the order, who fulfils it and who records the sales revenue? Consider at least the following:

• In-store purchases by customers from outside the territory.
• Deliveries through third-party apps.
• Orders placed through the brand’s website or call centre.
• Corporate customer contracts covering several states.
• Temporary sales at exhibitions, kiosks or events.

For example, online orders could be allocated according to the delivery address or outlet capacity. This is an operational decision that must be stated explicitly, rather than assuming that all orders from an area automatically belong to the local franchisee.

If the franchisor wishes to retain certain corporate accounts or the right to open temporary kiosks, list those exceptions clearly. Also explain the payment arrangements when a franchisee provides delivery or services for centrally managed sales. Avoid giving the impression of comprehensive exclusivity if many channels are actually excluded.

4. Establish a process for changes before overlaps arise

Territories may need to be reassessed when premises relocate, shopping centres close or customer patterns change. However, commercial needs should not be treated as automatic permission to reduce rights that have already been agreed.

If exclusivity depends on performance, specify the measures, data sources, assessment period and subsequent action. Distinguish between a franchisee’s failure to meet its obligations and disruption beyond its control. Provide a process for discussion and review before decisions are made, subject to the agreement and applicable law.

Create a central territory register recording rights holders, boundaries, exceptions, effective dates and any amendments. The expansion team should check it before proposing new locations. The sales team must use the same information so that explanations given to prospective franchisees do not go beyond the actual rights available.

Under section 15(1) of the Franchise Act 1998, the franchisor must provide a copy of the franchise agreement and disclosure documents at least ten days before the franchisee signs the agreement. Make sure the territorial rights being offered are clear in the relevant documents. Seek a lawyer’s review of material amendments to the registered agreement, including any applicable requirements to notify or obtain approval from the Registrar of Franchises.

Practical action: before offering your first territory, prepare a map, a list of rights and exceptions, and a set of order-allocation rules. If your team cannot yet explain these consistently, the territory is not clearly defined enough.