Planning to grow your business, but have no idea whether you should do it through franchising or licensing? Below is a quick brief on what franchising and licensing is all about.
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A stagnant business spells doom for the owner. That’s why business owners are constantly growing their business, either by running the same modus operandi at another location or by allowing people to sell their products in exchange for a certain sum of monies. This is where franchising and licensing come into the picture.
What is franchising in Malaysia?
Franchise, or the act or franchising occurs when a franchisor enters into an agreement with a franchisee to allow the franchisee to conduct the franchisor’s business or to use the franchisor’s intellectual property/ trademark, according to the terms, regulations and control set out by the franchisor and the rules set out in the Franchisee Act (‘the Act’). In return, the franchisee agrees to pay a certain sum of monies to the franchisor for granting such rights to the franchisee. For example, you could enter a franchising agreement with KFC Holdings Malaysia Bhd to run a KFC outlet, subject to the franchising agreement between you and KFC Holdings. KFC Holdings will also have to a certain degree of control over how you are to run the business to ensure that everything (including the finger licking good fried chicken) complies with the their principles of running a KFC outlet.
What is licensing in Malaysia?
Licensing occurs when a licensor enters into an agreement with a licensee to allow the licensee to sell/ use the licensor’s products or intellectual property/ trademark. In return, the licensee will have to pay a certain sum of monies to the licensor, usually in the form of royalties, for the license obtained. A license is not governed by any specific laws- it is typically governed by contractual terms as agreed upon between the licensor and licensee. Let’s say you entered into a contract whereby KFC Holdings agrees to allow you to sell their product, e.g. fried chicken. In return you agree to remunerate KFC Holdings by paying them a certain sum or percentage based on the revenue from the fried chicken you sold. This is essentially what a licensing arrangement look like.
Differences between a franchise and a license in Malaysia
| Franchise | License | |
| Control | Franchisor has absolute control over the whole franchisee’s business operation and possesses the right to administer continuous control over the business operation during the course of the franchise term in accordance to the terms agreed upon between the franchisor and franchisee. | Licensor has no control over how the licensee operates the business. |
| Registration | A franchisor is required to register both his business and the trademark of his business with the Registrar of franchisers before he can enter into a franchise agreement with the franchisee. | Licensor does not need to register the license with anyone in particular. |
| Extension and Renewal | A franchisee has the right to ask for a renewal of the franchising agreement from the franchisor even if the franchisee has breached the terms of the agreement previously. If the franchisor chooses not to renew the agreement, he must compensate the franchisee by buying over the franchise or pay an agreed sum of monies to the franchisee. | A licensor is not obligated to renew/ extend the license or even compensate the licensee. This is however, subjected to the licensing agreement entered into between the licensor and licensee. |
| Termination | A franchisor cannot terminate the franchising agreement before the expiry of the agreement (usually not less than 5 years) unless:The franchisor can show that there is a “good cause” for terminating the agreement; orBoth parties agree to the termination; orThe court decides that the agreement should be terminated. | A licensor can terminate the licensing agreement if there is a breach of the terms of the agreement. This is subjected to the licensing agreement entered into between the licensor and licensee. |
| Explicit requirements that needs to be in the agreement | The Franchisee Act 1988 (the Act) provides a non-exhaustive list of terms that needs to be included in a franchise agreement. Failure to include these terms will render the agreement null and void. | There are no specific compulsory terms in a licensing agreement. Both the licensor and licensee will need to agree on what is to be included in the agreement. |
| Which one to choose from? | Allows franchisor to control the quality of the business in order to protect their brand on the long run. Allows franchisee to hedge on existing brand with established market recognition to help spur business growth. | Allows licensor to expand his business in a wider market as their reputation tarnished by the wrongdoings of the licensee. Allows the licensee the flexibility to tailor a business model that promotes the licensor’s products alongside the licensee’s business while still receiving a certain amount of profit from it. |
Make an appointment with Company Secretary and Business Lawyer for advice and consultation
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