Managing Deposits Before Signing a Franchise Agreement in Malaysia

When business owners begin building a franchise network, deposits are often seen as a simple way to confirm a candidate’s commitment. However, payments made before an agreement is signed can lead to disputes if their purpose and what will happen to the money are unclear. Before accepting any payment, establish written procedures explaining what the payment covers, when the money can be used and the circumstances in which it can be refunded.

1. Understand your obligations before accepting money

Malaysia regulates franchising through the Franchise Act 1998, including amendments in force. Section 19 requires franchisors to set out in writing the purpose of a payment and the terms governing its use and refund when an initial franchise fee is required or payment is requested before the franchise agreement is signed.

A written receipt alone may therefore be insufficient. It proves that money has been received, but does not necessarily explain the candidate’s rights if their application is rejected, a location is not approved or the process does not proceed. This information should be provided before the candidate decides to pay.

The name given to the payment does not resolve compliance issues either. Calling it a ‘good-faith payment’, ‘reservation deposit’ or ‘processing fee’ is no justification for overlooking the actual purpose of the payment and the associated legal obligations.

Section 6 also requires franchise registration before a franchisor operates a franchise business or offers a franchise for sale for operation in Malaysia. Do not use a deposit form as a shortcut to offering an unregistered franchise. Have a lawyer review your payment forms and offer process before using them.

2. Distinguish deposits from service fees

Start with one question: what does the candidate actually receive in return for the payment? If the answer is unclear, postpone collection until its purpose can be explained simply.

For example, money that will be credited towards the initial franchise fee serves a different purpose from a payment for assessing a particular site. Do not combine the two into a single amount without a breakdown. If the candidate is paying for an assessment, specify the scope of work, the deliverables and who will carry it out.

The payment form can cover the following:

• Purpose: the specific item or activity being funded or reserved.
• Recipient: the name of the entity receiving and taking responsibility for the money.
• Use: when the money can be used and which expenses it can cover.
• Credit towards fees: whether the payment will later be deducted from the initial franchise fee.
• Refunds: the circumstances in which the money can be refunded in full or after permitted deductions.
• Decision timeframe: when the application will be assessed and what happens if the assessment is delayed.

If the payment does not confer exclusive rights to a territory or premises, state this clearly. Candidates should not be led to believe that paying a deposit automatically guarantees approval as a franchisee or the right to open an outlet.

3. Define the outcome for each possible scenario

Do not simply write ‘non-refundable deposit’ as the answer to every situation. Such a blanket condition needs to be assessed for fairness and consistency with the Act. Create a decision table that sales, finance and management teams can use.

First, decide what happens if the franchisor rejects the candidate. Will all the money be refunded? If services have already been provided, were the deductions disclosed in advance, and can they be substantiated?

Second, decide what happens if the candidate withdraws before signing the agreement. Distinguish money that has not been used from the costs of work actually carried out. Avoid introducing deductions that were not disclosed when payment was requested.

Third, specify the outcome if the conditions for opening are not met, such as a failure to secure suitable premises. State whether the candidate can continue searching, request an extension or end the process under the agreed terms.

Fourth, establish a procedure for situations where the franchisor cannot proceed with the offer. Do not leave the candidate’s money in limbo without a decision or a settlement date. Set a target timeframe for refunds as an internal policy, rather than presenting it as a statutory deadline where there is no legal basis for doing so.

Rights relating to payments made before signing must be distinguished from termination rights during the cooling-off period after the agreement is signed. A deposit form must not be used to waive mandatory protections under the Act.

4. Establish payment controls and refund records

Use the bank account of the receiving entity named in the documents, rather than a salesperson’s personal account. Restrict authority to accept payments and approve deductions to designated staff. These internal controls help reduce errors and disputes.

Keep a file for each candidate containing the payment terms form, evidence of acceptance of those terms, receipts, work records, invoices for relevant costs and refund decisions. If the money is credited towards the initial franchise fee, issue a statement showing the adjustment so that the candidate is not charged twice.

Before you start collecting payments, test the process against several scenarios: a candidate is rejected, a candidate withdraws and premises cannot be secured. Make sure staff give consistent answers based on the documents, rather than exercising their own discretion.

Practical action: do not collect a deposit until its purpose, use, treatment as a credit towards fees and refund terms can be explained in one clear form. Have the form legally reviewed, then make sure your finance team can fulfil every commitment it contains.