How to Set Franchise Fees in Malaysia

Setting franchise fees is not simply a matter of copying other brands’ rates. For established business owners, fees need to fund the transfer of know-how and ongoing support without putting undue pressure on franchisees’ cash flow. In a healthy franchise network, both parties understand what is being paid for, which services are included and how charges are calculated. This guide helps you build a cost-based fee structure before offering franchises in Malaysia.

1. Separate opening costs from ongoing support

Start by listing all the work required to open a franchise outlet. Do not count only training materials or travel; include the time staff spend assessing locations, training managers, setting up systems and supporting the opening.

Divide costs into three groups:

• System development: preparing manuals, developing training modules, obtaining professional advice and setting up monitoring systems.
• Opening each outlet: initial training, setting up system accounts, site visits and pre-opening assistance.
• Ongoing support: operational assistance, follow-up training, quality control, system maintenance and network management.

The initial fee can help recover development and opening costs. However, do not try to recoup the entire development investment from your first franchisee. Allocate costs based on a realistic expansion plan, rather than the number of franchises you hope to sell.

For each task, record who will carry it out, the time required, direct expenses and the promised outcome. This list provides a basis for assessing whether the fees genuinely fund services you can deliver.

2. Base royalties on what outlets can afford

Royalties need to be assessed from two perspectives: the franchisor’s financial needs and the franchise outlet’s ability to pay. A rate that adequately funds head office may not be suitable if it leaves an outlet without enough cash to pay wages, replace equipment or cover quieter months.

Use your existing business’s operating records to build a realistic outlet profit and loss forecast. Include materials, staffing, rent, utilities, maintenance, local marketing and the manager’s remuneration. If the current owner works without a regular salary, factor in the cost of replacing their role; profits can appear higher than they really are if the owner’s labour is treated as free.

Then compare the following options:

• Sales-based royalties: payments vary with sales, but sales must be clearly defined.
• Fixed royalties: straightforward to budget for, but potentially burdensome when sales are low.
• A combination of fixed and variable payments: requires careful explanation so franchisees understand their total financial commitment.

Test each option under normal sales conditions, weak sales and rising costs. Assess the cash remaining after all franchise charges and financing commitments, not just the margin before royalties.

Also prepare a budget for the franchisor’s support services while the outlet network is still small. If support can only be funded by continually selling new franchises, the structure needs to be improved before expansion continues.

3. Explain all charges and how they are calculated

Prepare a fee schedule that can be understood without a verbal explanation. For each payment, state its purpose, recipient, calculation basis, due date and the circumstances in which it may change.

If royalties are calculated on sales, specify how discounts, refunds, taxes, vouchers and transactions through delivery platforms are treated. For example, is the calculation based on sales before the platform’s commission or the net amount received? Ambiguity can lead to disputes even when the royalty rate has been agreed.

Distinguish franchise fees from the total investment required to open an outlet. Rental deposits, fit-out costs, opening stock, premises licences and working capital may not be payments to the franchisor, but they still affect what a franchisee can afford.

Also list conditional charges, such as training for replacement staff, additional visits, renewal and the transfer of franchise rights. Explain whether each charge is mandatory, optional or payable only in specified circumstances.

For marketing contributions, explain why the money is collected, how the fund is managed and what reporting will be provided. Do not present these contributions as a guarantee of sales. If purchases from the franchisor or designated suppliers are compulsory, explain those arrangements so that the outlet’s true costs can be assessed.

4. Comply with Malaysia’s registration and disclosure rules

Malaysia regulates franchising through the Franchise Act 1998 [Act 590], including amendments in force. Under Section 6, franchisors must register their franchise with the Registrar of Franchises before operating a franchise business or offering franchises for sale for operation in Malaysia.

Franchise fees, royalties and related payments must be clearly stated in the disclosure document and franchise agreement. Prospective franchisees must receive the disclosure document and a copy of the agreement at least ten days before signing. Use this period to allow meaningful scrutiny, rather than pressing for an immediate decision.

Government registration guidance also lists operations manuals, training manuals and audited financial statements as supporting documents. Internal cost estimates alone do not replace these registration requirements. Check the current requirements with the Registrar of Franchises, as forms and administrative procedures may change.

Have a lawyer familiar with franchise law review payment terms, refunds and changes to charges. Ask an accountant to assess the tax implications and the sustainability of both parties’ cash flow.

Key action: Before setting the price of your franchise package, prepare three things: a breakdown of support costs, an outlet cash flow forecast after all charges and a clear fee schedule. A sound fee structure funds the support promised while giving franchisees room to build a resilient business.