What Is a Franchise Agreement?
A franchise agreement is a legally binding contract between a franchisor (the brand owner) and a franchisee (the investor/operator).
It gives the franchisee the right to:
- Use the franchisor’s brand name and trademark
- Operate using the franchisor’s business system
- Sell approved products or services
In Malaysia, franchise businesses are regulated under the Franchise Act 1998 (Act 590). The franchisor must register the franchise with the Ministry before offering it to franchisees. This makes Malaysian franchise agreements more regulated compared to some other countries.
Key Contents of a Franchise Agreement
A Malaysian franchise agreement typically includes:
- Territory & Opening Date – Your approved location and timeline to start operations
- Duration of Agreement – Commonly 5–10 years (renewable)
- Operational Standards – Business procedures, branding, quality control
- Training & Support – Initial and ongoing training provided
- Reporting Requirements – Sales and financial reporting obligations
- Compliance Clause – Must follow Malaysian laws and franchisor standards
Under Malaysian law, agreements must also clearly state cooling-off rights and disclosure obligations before signing.
Fees and Royalty Structure in Malaysia
Franchise agreements are not just about brand usage — they involve financial commitments:
Initial Franchise Fee
- Usually ranges from RM30,000 to RM200,000+, depending on the brand.
- Paid upfront for the license to operate.
Royalty Fees
- Commonly 4%–10% of monthly gross sales.
- Some franchises use a fixed monthly fee instead.
Advertising / Marketing Fees
- Often 1%–5% of revenue.
-
Used for national marketing campaigns.e.
Rights and Responsibilities of Both Parties
Franchisee Responsibilities:
- Pay fees and royalties on time
- Follow brand and operational standards
- Maintain product/service quality
- Submit financial reports
Franchisor Responsibilities:
- Provide training and operational manuals
- Protect trademarks
- Offer marketing and business support
- Avoid unfair territory overlap
In Malaysia, franchisors are legally required to provide a disclosure document before the agreement is signed.
Termination and Renewal Conditions
A franchise agreement will clearly state when it can be terminated.
Common Reasons for Termination:
- Failure to pay royalties
- Breach of operational standards
- Bankruptcy
- Criminal conviction affecting the business
- Loss of business license
Franchisees may terminate if:
- The franchisor misrepresents earnings
- Promised support is not provided
- Territory rights are violated
In Malaysia, termination procedures must follow the terms in the agreement and the Franchise Act. Written notice is usually required
Do You Need a Franchise Lawyer in Malaysia?
Yes, it is highly recommended.
A franchise lawyer can help you:
- Review compliance with Malaysian Franchise Act
- Understand hidden obligations
- Evaluate financial risks
- Negotiate certain clauses
You may also consult an accountant to:
- Calculate break-even point
- Forecast royalty impact
- Assess long-term profitability
Franchise agreements in Malaysia are legally structured and regulated, so professional advice can protect you from costly mistakes.
Penny Lim , Legal Consulting
Ms. Penny is responsible for identifying possible legal issues and implementing solutions in the areas of government regulation, customer protection, and fair employment. Legal Counsel. Ms. Penny can advise on legal issues such as government and business permits, review legal documents before signing them, and complete legal research as needed by the company
Need Assistance for Franchise Agreement?
Starting a franchise can be a faster way to enter business because you benefit from brand recognition and a proven system.
A well-understood franchise agreement sets the foundation for a successful franchise journey.
Understanding Franchise Agreements in Malaysia: A Complete Guide for New Franchisees