Licensing vs franchising in Malaysia; which one is best for you?
If you are a business owner, we are sure you have heard of the terms ‘licence’ and ‘franchise’. However, how do these terms differ, and which business expansion method suits your specific circumstances?
Undoubtedly, the matter of licensing vs franchising in Malaysia is pertinent and should be of utmost importance. After all, choosing one may be just what you need to carve your name in the business world.
For most countries, the same area of law governs licensing and franchising. However, uniquely in Malaysia, the two methods are under two distinct statutory instruments. Read on to know more.
What Is Licensing in Malaysia?
The term ‘licence’ means a contractual agreement between two independent parties (licensor and licensee) governed under the law of contract. It is another alternative to franchising, as it entails the licensor granting the licensee the right to use its intellectual property and goods or services in exchange of a licensing fee.
Since there is no specific legislation pertaining to licensing, its concept is entirely based on the terms and conditions of the license agreement as agreed by both parties. The agreement will entail the rights and obligations of the licensor and the licensee, the amount of licence fee needed, and more.
A licence model provides far less control over the licensee’s daily business operation than a franchise model. In fact, it is common for a licensor to have minimal to no operational control of how the business runs.
There are various types of licences in Malaysia, namely:
- Exclusive Licence
- Non-Exclusive Licence
- Co-Exclusive Licence
- Sole Licence
What Is Franchising in Malaysia?
The term ‘franchise’ is generally understood to involve two parties; the franchisor (an established individual/company with a licensed business model) and the franchisee (an individual/company that operates the business using the business model license given by the franchisor).
Through licensing, the franchisee is able to rightfully use the franchisor’s brand, skills, and operational expertise in exchange for mutually agreed payments, such as an upfront franchise fee and recurring royalties.
Franchising is governed under the Franchise Act 1998, which is subsequently amended by the Franchise (Amendment) Act 2012 and the Franchise (Amendment) Act 2020 and is regulated by the Register of Franchises (Registrar) under the purview of the Ministry of Domestic Trade and Consumer Affairs. Here is what you should know:
- The franchisee must operate the business in line with the franchise system set by the franchisor;
- The franchisor should grant the franchisee the right to use the intellectual property relating to the franchise;
- The franchisor has the right to helm continuous control of the franchisee’s business operations according to the franchise system;
- The franchisee is to pay a fee or other form of consideration in exchange for the grant of rights.
Based on the High Court in Noraimi bt Alias v. Rangkaian Hotel Seri Malaysia [2009] 9 MLJ 475, the franchise agreement “takes a dimension beyond the simple private business relationship between the contracting parties to one that includes the interests of the consumer and good business practises”. This case clearly explains the importance of the registration of franchise.
Imagine going to a KFC store; you would expect the fried chickens to taste the same regardless of the location, right? As such, it is compulsory for the franchisee to run the business in accordance with a franchise system, typically outlined in an “operations manual.”
Due to this, the franchisor will exert considerable ongoing control over the franchisee’s management of its operations. By doing so, customers are able to receive the same level of goods and services consistently.
Read More: What You Must Know About Contractual Obligations in Malaysia
Licensing vs Franchising Malaysia: Key Differences
| Matter | Licensing | Franchising |
|---|---|---|
| Governed by | Regulated by Contracts Act 1950 | Regulated by Franchise Act 1998 |
| Registration | Optional | Mandatory |
| Training & Support | Only technical/product knowledge training is offered at the beginning | Continued assistance and guidance are offered |
| Use of Trademark/Logo | May be licensed by the licensor to the licensee | Retained by the franchisor and used by the franchisee |
| Control | Minimal operational control | Tight operational control |
Read More: Contract Process And Benefits Of Contract Management In Malaysia
The Bottom Line
In order to ensure a profitable return, it is crucial for business owners to have a thorough understanding of the difference between licensing and franchising in Malaysia. Engage an experienced corporate & commercial lawyer to ensure you have accurate and necessary agreements to help you successfully expand your business.
