Managing Cooling-Off Periods in Malaysian Franchise Agreements

When an established business starts franchising, signing an agreement is not a licence to spend all the money received straight away. Franchisees have cooling-off rights that need to be reflected in practical procedures. To build a trusted franchise network, business owners should establish how they will receive cancellation notices, control early commitments and manage refunds before the first agreement is signed.

1. Understand cooling-off rights under Malaysian law

Franchising in Malaysia is specifically regulated by the Franchise Act 1998, including amendments made through the Franchise (Amendment) Act 2020. Section 18 requires franchise agreements to be in writing and to include mandatory provisions, including a cooling-off period.

This period must be at least seven working days. During that time, the franchisee has the option to terminate the agreement. If they exercise that option, the franchisor may retain an amount covering reasonable expenses incurred in preparing the agreement, but must refund the rest of the money received.

Do not confuse this right with pre-contract disclosure. Section 15 requires the agreement and relevant documents to be provided at least ten days before the agreement is signed. Disclosure helps prospective franchisees make an informed decision; the cooling-off period gives them an option after the agreement has been entered into. Neither replaces the other.

Ask a franchise lawyer to review the clauses and the method for calculating dates, including the effect of weekends and applicable public holidays. Do not simply insert the phrase “seven days” without making clear that the statutory minimum is measured in working days.

2. Design a cancellation process with a clear audit trail

Before offering a franchise, decide who will receive cancellation notices and how receipt will be recorded. An unclear process could mean a prospective franchisee sends a notice to a salesperson, while the finance team remains unaware until the money has already been spent.

Prepare an internal procedure that specifies:

• the email address or official channel for receiving notices;
• the lead person responsible and their deputy when they are on leave;
• how the date and time of receipt will be recorded;
• the steps for acknowledging receipt to the franchisee;
• the action required to stop new orders and commitments;
• who will review and approve refunds.

A cancellation form can simplify administration, but it should not become an additional barrier to the franchisee exercising their rights. If a notice arrives in another form, refer it promptly to the person responsible for review rather than rejecting it outright because it uses a different format.

After signing, provide a written summary of the cooling-off dates, the channel for submitting notices and the relevant contact person. This summary supports implementation, but does not replace the agreement or restrict the rights granted by the Act.

Make sure the sales team does not promise that all payments already belong unconditionally to the franchisor. Sales scripts and financial instructions must respect the same cancellation rights.

3. Limit financial commitments during the cooling-off period

A common mistake is to order signage, pay suppliers or start refurbishment as soon as the agreement is signed. If the franchisee cancels, the franchisor may remain bound by those orders despite having to refund the money received.

Divide initial activities into two groups. The first covers work that can proceed without significant financial commitments, such as scheduling discussions and reviewing document checklists. The second covers work best deferred, such as bespoke orders, construction contracts and equipment purchases that are difficult to cancel.

For example, a food business preparing to franchise could obtain quotations for kitchen equipment without immediately authorising an order. The opening date should allow for the cooling-off period, rather than depend on the franchisee waiving their rights so that work can begin immediately.

From a financial perspective, track the money received from each franchisee and ensure sufficient funds remain available for refunds. This is prudent cash management, not a claim that all franchisors are required to use a particular type of trust account.

If an expense cannot be deferred, obtain legal advice on its implications first. A commercial agreement to bring work forward does not necessarily allow the cost to be deducted from a refund.

4. Prepare transparent refund calculations

Distinguish reasonable expenses incurred in preparing the agreement from the costs of acquiring customers or running the business. Do not assume that sales commissions, advertising, training, stock orders or lost profits automatically qualify as permitted deductions.

Keep supporting evidence for every amount you propose to retain. Records should explain the work performed, who carried it out, the date and its connection to preparing the agreement. Avoid lump-sum deductions labelled simply as “administration charges” without explanation.

When a cancellation notice is received, prepare a statement showing the total amount received, the proposed deductions and their basis, and the balance to be refunded. Set an internal processing target and tell the franchisee when payment is expected. Do not present that internal target as a statutory deadline without verification.

Test the procedure with a simulation before taking on your first franchisee. Ask the sales, administration and finance teams to handle a sample cancellation through to payment. If they give different answers about deadlines or deductions, the process is not yet ready.

Practical action: Before signing the first agreement, finalise the cooling-off calendar, notice channel, list of deferred expenses and refund template. Have a lawyer review them to ensure your internal procedures give effect to franchisees’ rights rather than merely mentioning them in the contract.