Most people would be familiar with big name brands such as KFC, McDonald’s, Subway, Starbucks and Marriot. These brands are among some of the most established and popular foreign franchise brands in Malaysia. But do you know that you may also apply to operate your own business using the franchise model? Franchise has the potential to be a faster method to expand a business based on the franchisor-franchisee relationship. Among the advantages that this type of business model, the franchise model could offer access to franchisee to own an established and well-known brand.
Franchising has emerged as a popular business model in recent times, providing entrepreneurs and investors with a convenient and accessible approach to starting their own business. In a franchise arrangement, an individual or company (franchisee) purchases the right to operate a business under the established brand name and business model of a larger and more established brand (franchisor). Franchising offers numerous benefits to both franchisors and franchisees, including shared operational and marketing expenses, established brand recognition, and access to proven business systems and support. As a result, franchising has become a viable option for aspiring business owners looking to start their own venture without the hassle of starting from scratch.
The definition of franchise in Malaysian legal framework can be referred to in section 3 of the Franchise Act 1998 (Act 590) whereby – “franchise means a contract or an agreement, either expressed or implied, whether oral or written, between two or more persons by which – (a) 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”. Franchising business does not only mean a franchisor granting to the franchisee the right to operate the business, but also means granting to the franchisee the right to use a mark, trade secret or confidential information or intellectual property owned by the franchisor. In order for the franchisee to obtain the grant from the franchisor to operate the business, the franchisee must pay certain amount of fee prescribed by the franchisor.
Aside from the principal Franchise Act 1998 (“FA 1998”) which has been subsequently amended to the Franchise (Amendment) Act 2012, other important laws and regulations pertaining to franchising are the Copyright Act 1987 (Act 332) (Intellectual Property), the Trademarks Act 1976 (Act 175) (Intellectual Property) and the Patents Act 1983 (Act 291) (Intellectual Property).
In Malaysia, franchise registration is managed by Franchise Development Division governed by the Registrar of Franchises or Registrar, a sub department under the Ministry of Domestic Trade and Cost of Living. Franchise Development Division has the power to oversee all applications relating to franchising as well as regulate and enforce laws of franchising in Malaysia.
Appointment of Registrar, Deputy Registrars and Assistant Registrars
Section 5 of FA 1998 provides that the Minister may appoint a Registrar as well as Deputy Registrars and Assistant Registrars and other officers. The Registrar is subjected to the general direction and control of the Minister to perform the duties and powers under FA 1998.
Registration of Franchisor
Franchisor shall register his franchise business with the Registrar before he can make an offer to sell the franchise system to any franchisee under section 6(1) of FA 1998. Failure by the franchisor to comply with subsection (1), unless exempted by the Minister under section 58, the franchisor shall be liable under section 6(2) of FA 1998 depending on whether such franchisor is a corporate entity or not a corporate entity.
Registration of Franchisee of Foreign Franchisor
It is a requirement for local franchisee to apply and/or register the foreign franchise business with the Registrar in Malaysia before he commences operations. The Registrar may impose any conditions for the approval of registration of franchise pursuant to section 6A(2) of FA 1998.
Likewise, the registration not only applies to local franchisee operating under foreign franchisor, a franchisee who has been granted a franchise from a local Malaysian franchisor also needs to register its franchise with the Registrar within 14 days from the date of signing of the agreement pursuant to section 6B of FA 1998.
That are among brief legal perspectives of starting a franchise business however apart from its legal and regulations aspects, here are some of the steps and considerations before establishing franchise business in Malaysia.
Step 1: Conduct Market Research
Before starting any business, it is essential to conduct market research to determine the viability and profitability of the business idea. In the case of franchising, this involves identifying the franchisors that operate in Malaysia and assessing the demand for their products or services. Potential franchisees should also evaluate the competitive landscape and identify any potential challenges they may face in the market.
Step 2: Select a Franchise
Potential franchisees should research and evaluate the different franchise opportunities available to them. This involves reviewing the franchisor’s history, financial standing, and track record of success. Franchisees should also consider the franchisor’s training and support programs, the initial and ongoing costs of the franchise, and the terms of the franchise agreement.
Step 3: Negotiate and Sign the Franchise Agreement
Once a potential franchisee has selected a franchise, the next step is to negotiate and sign a franchise agreement. The franchise agreement is a legal contract that outlines the terms and conditions of the franchise relationship, including the franchise fee, ongoing royalties, operational requirements, and termination clauses. It is essential to review and negotiate the terms of the franchise agreement with the franchisor’s legal team to ensure that the agreement is fair and equitable.
Step 4: Register the Franchise
As discussed earlier, in Malaysia, all franchisors and franchisees must register their franchise with the Registrar of Franchises under the Franchise Act 1998. The registration process involves submitting an application form, a copy of the franchise agreement, and supporting documents such as audited financial statements and marketing materials.
Step 5: Obtain Business Licenses
In addition to registering the franchise, franchisees must also obtain the necessary business licenses and permits to operate their franchise. These licenses and permits vary depending on the nature of the business and the location of the franchise. Common licenses and permits include a business license, a food and beverage license, and a signage permit.
In conclusion, franchising offers entrepreneurs and investors in Malaysia an alternative way to start their own business. It is important to conduct thorough market research, evaluate franchise opportunities carefully, negotiate the franchise agreement, register the franchise, and obtain the necessary business licenses and permits before operating a franchise business. By following these basic steps, aspiring franchisees can secure their legal and financial interest and build a profitable franchise business.
Authored by Hussaini Rozi
Kindly note that this legal article does not, and is not intended to, constitute formal legal advice by the Firm, instead all information, content and materials available on this site are for general informational purposes only. If readers require further clarification or legal advice, please email office@kevinwuassociates.com
