Setting the Term of a Franchise Agreement in Malaysia

The term of a franchise agreement is more than just a number inserted by a solicitor. For business owners looking to build a franchise network in Malaysia, this decision determines how long operating rights are granted, support must be provided and investment commitments must be sustained. The chosen term must comply with the law and reflect how the business actually operates, rather than simply copying other brands.

1. Understand the statutory minimum before choosing a term

In Malaysia, franchising is governed by the Franchise Act 1998 (Act 590), including amendments that came into force in 2022. Section 25 stipulates that a franchise term must be no less than five years. This is the statutory minimum, not a recommendation that every business concept should use a term of exactly five years.

Section 18 also requires franchise agreements to be in writing. The duration of the relationship should therefore not be left to verbal explanations, sales messages or an assumption that franchisees can continue operating as long as they pay royalties.

Avoid offering a short-term “trial franchise” with a promise that the actual agreement will follow later. Changing the name of a document does not necessarily change the nature of the relationship. If the proposal has the characteristics of a franchise, have a solicitor review it before using it to test prospective franchisees or the market.

Also distinguish between the agreement term and the right to terminate the agreement. A five-year term does not mean either party is free to terminate at any time. The Act also restricts termination before the end of the term and sets out requirements relating to good cause. Do not make a long term appear risk-free by promising exit arrangements that have not been legally reviewed.

2. Assess the commitments the initial term must accommodate

Start by listing the franchisee’s commitments throughout the initial term, rather than focusing on franchise package sales targets. Record the initial investment, preparation time, replacement of major assets and the need to establish a stable operating team.

Then gather evidence from the existing business to answer the following questions:

• How long does it usually take for operations to reach a stable level of performance?
• Does demand vary by season or customers’ calendars?
• Which assets might need replacing before the agreement expires?
• Does the model depend on the owner working in the business full-time?
• What additional commitments are expected after opening?

The aim is not to promise that the investment will be recovered before the term ends. Instead, use this information to assess whether the proposed term provides a reasonable operating period, taking costs and risks into account.

For example, if a major refurbishment is likely to be needed towards the end of the initial term, do not overlook this when offering the franchise. Explain that expectation and consider how the cost affects the attractiveness of the offer.

A longer term is not necessarily better either. It extends the franchisee’s exposure to a model that may change, as well as the franchisor’s responsibility to support it. The decision needs to balance both sides, rather than simply producing attractive-looking investment figures.

3. Define the start date precisely

Once you have chosen the length of the term, decide when it begins. The signing date, premises handover date and opening date may all differ. Ambiguity between these dates can easily lead to disputes over how much operating time remains.

Prepare a simple schedule showing:

• Agreement date: when the relevant parties sign the document.
• Effective date: when the specified obligations begin to apply.
• Target opening date: when operations are expected to begin.
• Start and end dates of the franchise term: the basis for calculating the duration of the rights granted.

Ask a solicitor to ensure that this date structure complies with the Act and does not reduce the minimum term through confusing arrangements. Do not assume that simply writing “five years” resolves every issue.

Also decide how opening delays will be handled. If a contractor is late or operational preparations are incomplete, who must be informed, what evidence is required and how will date changes be recorded? Any adjustment should follow an appropriate written process, rather than an informal decision by the sales team.

If a change materially affects the registration documents, check whether prior approval from the Registrar of Franchises is required. Agreement between the two parties alone may not be enough to meet regulatory obligations.

4. Test your ability to deliver on promises throughout the term

Before finalising the offer, present the proposed term to the operations, finance and management teams. Ask each team to identify the commitments that must be maintained until the expiry date, including system maintenance, technical assistance and the retention of operational knowledge when staff change.

Record the reasons for choosing the term in an internal decision note. Set out the evidence used, key assumptions and unresolved risks. This note will help the team explain the offer consistently without presenting the contract term as a guarantee of profit.

Make sure prospective franchisees receive a clear explanation of the initial term before making a decision. Under Section 15 of the Franchise Act 1998, a copy of the agreement and the disclosure documents must be provided at least ten days before the agreement is signed. This review period should be used to understand the full commitment, including when the rights begin and end.

Practical takeaway: choose a term based on the statutory minimum, operational evidence and your ability to deliver on promises. Confirm the length of the term and its start and end dates in writing before presenting the offer to prospective franchisees.