Looking at the lifestyle outlets sprouting up in shops and malls these days gives people the impression that franchising is the easiest way to start a business. With planning, knowledge and of course money, it can be.
Franchising is when a business owner gives you the right to use his brand, product, business system to operate your business in return for payment.
A. The Basic Questions
Does the food fad you saw recently in a Taipei night market or latest fashion brand in Milan’s Quad d’Oro fit the tastebuds of Cheras or dress sense of Damansara?
Franchise is a unique business concept. It is not a buyer-seller relationship but a comprehensive and inter-dependent relationship between you (franchisee) and the owner (franchisor). Are you ready for a relationship?
The business you are going to run is spelt out in thick and complex legal documents : disclosure document, operation manual, training manual and the franchise agreement. Do you know what you are getting yourself into ?
B. Franchise or Licence?
Unlike overseas, in Malaysia franchising is a regulated business that is monitored under the Franchise Act. As long as the business is operated using a franchise system, the franchisor must register the franchise before it can be sold to you. If not, any agreement you sign for the franchise is not valid and both parties would be committing an offence under the law.
Documents such as the franchise agreement, disclosure documents and the financial report of the franchise must be submitted to the franchise registry every year. The law also spells out the duties and responsibilities of the franchisor and franchisee owe to each other.
If you choose a licence instead, parties have the freedom to negotiate the terms they wish but are then exposed to the risks of unequal skills, bargaining positions and vagaries of the marketplace.
The franchisor is by law required to give you a copy of the franchise agreement and disclosure documents at least ten days before the signing of the franchise agreement.
In licencing, you must rely on information given to you by the Licensor or revealed by company search, CTOS search or due diligence performed by your lawyer.
It is normally hard to negotiate terms of the franchise with the franchisor. The operation manual and terms in the franchise agreement are usually uniform across all franchise outlets.
A license agreement on the other hand is more flexible and can be changed to tailor-suit the licensee.
The franchisor controls how the franchise business is being run via the operation manual and the franchise agreement.
Under sections 26 and 27 of the Franchise Act you must keep the confidential information obtained from the franchise secure and not to operate a business similar to the franchise at least two years from the termination of the franchise agreement.
The minimum period for a franchise is five years [Section 25 of the Franchise Act]. Depending on the kind of business this period can sometimes be longer.
There is no minimum period for a license. It is entirely up to the parties how short or long they want the license to be.
C. Important terms in a Franchise
All terms in the franchise that you agree with the owner must be set down in writing and signed. The important ones are:
Operation (Management and Training)
This is the heart and soul of the franchise. Understanding the how, what and who of the franchise is not just good for business, it is survival.
The franchise gives you exclusive rights to a geographic area. No competitor franchisee is allowed to set up shop in your exclusive zone.
As franchisee, you are authorised to use the trademarks, the recipe, copyright materials of the franchise. In some cases, the franchisor will set some limits as to their use.
Cooling off Period
You can still change your mind about going into the franchise within seven (7) days after signing the franchise agreement. By relying on the cooling off period clause you can terminate at this point but you would need to pay all the costs incurred to date.
This is the price you need to pay for the franchise. The main fees are the royalties and marketing fees.
Third party suppliers
As franchisee you are only allowed to get your goods and services for the business from certain suppliers nominated by the franchisor. You can be in breach of your franchise if you buy your goods or services from parties outside of the franchisor’s list of suppliers.
At the end of the franchise period as long as you have complied with all the terms, you are entitled to renew the franchise by giving six months notice in writing to the franchisor.
If the franchisor decides not to renew the franchise he must compensate you either by paying you a reasonable sum or buying back the franchise from you
A franchise cannot be terminated for the first five years unless both parties agree mutually to cancel or if the cancellation is by court order.
D. Getting Started
You must register yourself as a franchisee within fourteen days after you signed the franchise agreement (Section 6B of the Franchise Act).
By regularly reviewing the operation of the franchise it will help you implement new operation system and marketing plan more effectively.
As franchisee you must run the business properly according to the operation and training manuals and ensure that all the staff are properly trained.
It is good practice to keep the franchisor informed about the business with suggestions and feedback. Communication is important in building a good franchise relationship.
In exchange for payment of fee and royalty, the franchise owner is obliged by law to assist you as franchisee in making your franchise business a success.
Andrew Yoon, Barrister-at-Law (Middle Temple)