Separate the Responsibilities of Franchise Entities in Malaysia

When an existing business begins offering franchises, a shared brand can obscure an important question: who actually operates each outlet? Customers may see a single network, but franchisors and franchisees have their own responsibilities. Before building a franchise network, establish clear boundaries between entities so that contracts, sales receipts, recruitment and supplier dealings do not rest on assumptions.

1. Distinguish control over the system from running the business

In Malaysia, franchising is specifically regulated by the Franchise Act 1998 (Act 590). The definition of a franchise in section 4 covers the right to operate a business according to the franchisor’s system, the use of related intellectual property and the franchisor’s right to exercise continuing control over operations in accordance with that system.

However, the definition also provides that the franchisee operates the business separately from the franchisor. Their relationship must not be regarded as a partnership, a contract of service or an agency relationship. The right to set brand standards is therefore not a licence to treat both parties as a single entity.

For example, a franchisor may specify product preparation methods and quality requirements. That does not, in itself, mean the franchisor purchases all materials, employs outlet staff or signs maintenance contracts on the franchisee’s behalf.

For owners accustomed to managing every outlet themselves, this change requires a deliberate approach. List decisions relating to system standards separately from those that create legal or financial commitments. The second list must identify the responsible entity and the person authorised to act on its behalf.

2. Map out the parties responsible for each key activity

Prepare a responsibility matrix before putting together your franchise package. Use entities’ registered names, rather than just the brand name or an informal name for the owner. Check entity details against records held by the Companies Commission of Malaysia (SSM), and ensure that the party named in the agreement is the one that will actually operate the business.

At a minimum, the matrix should answer the following questions:

• Premises contracts: which entity is the tenant and pays the deposit?
• Purchasing: who places orders, receives invoices and is liable for debts to suppliers?
• Employees: who offers employment, pays wages and fulfils employer obligations?
• Sales: who is the seller to the customer and receives the sales proceeds?
• External services: who appoints maintenance providers, system providers or contractors?
• Insurance: which entities and activities need cover under the relevant policies?

Not every network needs the same arrangement. If the franchisor purchases materials centrally and then sells them to franchisees, record those two transactions clearly. Do not allow suppliers to assume that the franchisor guarantees a franchisee’s debts simply because orders use the same brand.

For each activity, also record who approves it, who signs and who retains the supporting records. A franchisor’s approval of a design, for example, does not necessarily make it a party to the refurbishment contract.

3. Reflect those boundaries in documents and systems

Section 18 of the Franchise Act 1998 requires franchise agreements to be in writing. Among the matters that must be specified are the franchisor’s obligations, the franchisee’s obligations, and the type and details of assistance provided by the franchisor. Use these provisions to explain how responsibilities are divided, rather than merely stating that the franchisee is a separate operator.

Ask a lawyer to clarify the scope of central support: does the central team simply recommend suppliers, co-ordinate orders or actually act as the purchaser? If head office staff assist with negotiations, specify the limits of their authority and who must give final approval.

Then reflect that division in everyday working tools:

• Purchase order templates clearly identify the purchasing entity.
• Employment offer letters identify the actual employer.
• Sales systems distinguish the receipts of each operator.
• Access to financial accounts is granted according to role, rather than shared without controls.
• Letters to suppliers clarify which party is responsible for payment.

If customer payments are processed centrally, document the basis of the arrangement, how funds are settled with franchisees, permitted deductions and the handling of refunds. Obtain appropriate accounting and legal reviews. Avoid using one bank account for multiple entities without a clear structure and records.

4. Test the boundaries through real-life scenarios

Before a franchised outlet opens, run a short exercise with the finance and operations teams and the prospective operator. Choose a few scenarios: a supplier chasing overdue payments, an employee requesting a letter confirming their employer, a customer needing an invoice or a contractor asking for an additional signature.

For each scenario, ask the team to identify the responsible entity, the relevant reference document and the person authorised to make the decision. If the answer is simply “refer it to head office”, the division of responsibilities is still not clear enough. Head office support does not remove the need to identify the responsible party.

Also review materials seen by external parties. Transaction documents should clearly identify the operator and meet applicable legal requirements without undermining brand presentation. Explain to franchisees that this separation is not a reason for the franchisor to avoid its support obligations; both parties must still fulfil their agreed responsibilities.

Practical step: choose the five most frequent transactions in your business. For each one, write down the name of the entity that enters into the contract, makes payment and bears responsibility. Resolve any ambiguity before handing operations over to a franchisee.