Overview of Franchising in Malaysia: A Guide for Aspiring Franchisors

Franchising has emerged as a popular business model globally, offering entrepreneurs a pathway to expand their brand and grow their business through partnerships with franchisees. In Malaysia, franchising has experienced significant growth in recent years, contributing to the country's economic development and fostering entrepreneurship. This article provides an overview of franchising in Malaysia, exploring its dynamics, opportunities, challenges, and regulatory framework.

WHAT IS A FRANCHISE?

A franchise is a business agreement that enables the blending of the innovator's (franchisor) reputation, goodwill, innovation, technical knowledge, and expertise with the energy, industry, and investment of another party (franchisee). This collaboration is aimed at conducting the business of offering and selling goods and services.

THE GROWTH OF FRANCHISING IN MALAYSIA

Over the past few decades, Malaysia has witnessed a remarkable expansion of the franchising sector, driven by various factors such as economic growth, increasing consumer demand, and a favourable business environment. The country's vibrant market, coupled with its strategic location in Southeast Asia, has attracted both local and international franchisors seeking to capitalize on the growing consumer base. Today, the franchising in Malaysia spans across popular industries such as food and beverage, retail, education and healthcare and wellness, with more than 1000 franchisers registered under the Franchise Act 1998.

OPPORTUNITIES FOR ENTREPRENEURS

Franchising provides a platform for entrepreneurs seeking rapid expansion and sustainable growth. It is seen as an attractive business model for its multitude of benefits such as:

1. Rapid Expansion. Franchising facilitates accelerated growth by leveraging the capital and resources of franchisees. Instead of funding new locations independently, franchisors can rely on motivated franchise partners to invest in opening and operating additional outlets. This enables the brand to penetrate new markets and reach customers far beyond what would be feasible through organic growth alone.

2. Minimal Capital Investment. Unlike traditional expansion methods, franchising generally requires minimal capital investment from the franchisor. Franchisees typically invest in the setting up and running individual locations, including leasehold improvements, equipment purchases, and initial inventory. This allows franchisors to allocate resources towards strategic initiatives such as marketing, innovation, and brand development.

3. Diversified Revenue Streams. Franchising provides a steady stream of revenue for franchisors in the form of franchise fees, royalties, and other ongoing payments from franchisees. This diversified income helps stabilise cash flow and reduces reliance on revenue from company-owned locations or other sources. Additionally, as the franchise network expands, so too does the potential for revenue growth and profitability.

4. Brand Expansion and Recognition. A successful franchise network enhances brand recognition and market penetration as franchise locations proliferate across different regions. Each new outlet serves as a brand ambassador, introducing the business to local communities and attracting new customers. The collective impact of multiple franchise units contributes to heightened brand visibility and credibility in the marketplace.

5. Local Expertise and Market Knowledge. Franchisees bring invaluable local expertise and market knowledge to the table, enabling franchisors to tailor products, services, and marketing strategies to specific geographic areas. This localised approach enhances customer engagement and satisfaction, fostering deeper connections with the target audience. Franchisees' understanding of local preferences, cultural nuances, and competitive dynamics enhances the overall performance of the franchise network.

THE REGULATORY FRAMEWORK FOR FRANCHISE BUSINESS IN MALAYSIA

The Franchise Act 1998

In Malaysia, franchising is governed by the Franchise Act 1998 (“FA 1998”), which aims to regulate the franchising industry and protect the interests of both franchisors and franchisees.

A “franchise” is defined in section 4 as a contract or an agreement, either expressed or implied, whether oral or written, between two or more persons by which:

1. The franchisor grants to the franchisee the right to operate a business according to the franchise system as determined by the franchisor during a term to be determined by the franchisor;

2. The franchisor grants to the the franchisee the right to use a mark, or a trade secret, or any confidential information or intellectual property, owned by the franchisor or relating to the franchisor, and includes a situation where the franchisor, who is the registered user of, or is licensed by another person to use, any intellectual property, grants such right that he possesses to permit the franchisee to use the intellectual property;

3. The franchisor possesses the right to administer continuous control during the franchise term over the franchisee's business operations in accordance with the franchise system; and

4. In return for the grant of rights, the franchisee may be required to pay a fee or other form of consideration.

The FA 1998 requires franchisors to register their franchise businesses with the Registrar of Franchise, adhere to disclosure requirements, and provide prospective franchisees with relevant information and documentation.

Under the FA 1998, franchisors are obligated to furnish franchisees with a disclosure document containing details about the franchisor's background, business experience, financial status, franchise fees, terms of agreement, and other pertinent information. This transparency enables prospective franchisees to make informed decisions and mitigates the risk of potential disputes or misunderstandings.

HOW DO YOU SET UP A FRANCHISE?

The legal requirements

Section 7(1) provides that a franchisor must make an application to register his franchise by submitting to the Registrar a form together with the prescribed fee, which is RM1,000.[i]

Failure to register a franchise is an offence and may result in a fine up to RM250,000 for the first offence, and up to RM500,000 for any subsequent offence.[ii]

In order to prepare a business to be registered as a franchise, there are a few documentations and information that need to be prepared before registering the franchise.

1. Franchise documentation. Comprehensive documentation including a Franchise Disclosure Document and a Franchise Agreement must be prepared. The Franchise Disclosure Document should contain detailed information about the business concept, franchise fees, royalties, territory rights, training and support, and financial projections in order to comply with the Franchise Act 1998 and other relevant regulations. In respect of the Franchise Agreement, section 18(1) of the FA 1998 requires a franchise agreement to be made in writing.

2. Intellectual property protection. Protect your brand by registering trade marks and intellectual property rights with the Intellectual Property Corporation of Malaysia (MyIPO). Trade mark registration provides legal protection against unauthorised use or infringement by third parties. Apart from being a prudent business practice, section 24 of the FA 1998 requires that a franchisor registers its trade mark before applying for registration of the franchise.

Then the franchisor can make an application to the Registrar as mentioned above, together with the following:

1. The complete disclosure documents with all the necessary particulars filled in;

2. A sample of the franchise agreement;

3. The operation manual of the franchise;

4. The training manual of the franchise;

5. A copy of the latest audited accounts, financial statements, and the reports, if any, of the auditors and directors of the applicant; and

6. Such other additional information or documents as may be required by the Registrar for the purpose of determining the application.

Developing Training and Support Programmes and Operational Systems

On the practical side, the business must of course design training programmes and support materials to educate franchisees on the business concept, operations, marketing strategies and brand standards. A comprehensive operations manual is required in order to implement standardised operational systems and procedures that franchisees can follow to replicate the success of the business model. This includes inventory management, quality control, customer service protocols and reporting requirements.

CONCLUSION

With a myriad of pathways to business expansion, franchising presents a compelling avenue for entrepreneurs in Malaysia tap into new markets rapidly. By leveraging the strengths of the Malaysian market, adhering to best practices in franchising, and fostering collaborative partnerships with franchisees, franchisors can unlock the full potential of their brands and achieve sustainable growth in the dynamic and competitive business landscape of Malaysia.

‍This article is written by  Raja Nadhil Aqran (Partner) and Keefe Ong Kin Fye. It only contains general information. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such.

If you would like more information on how to set up or register a franchise, improve your contracts, or require assistance in claiming for outstanding debts or defending against any claim for outstanding debts against your franchisees, contact us at info@aqranvijandran.com.

[i] Franchise (Forms and Fees) Regulations 1999.

[ii] Section 6(2) of the FA 1998.

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