LAW.com.my

Franchises

Let’s begin first be defining what a franchise is, a franchise is basically an agreement between two or more people whereby the franchisor grants the right so that the franchisee is able to operate the business in accordance to the franchise system. The system will then be established by the franchisor during the term that will be determined by the franchisor.

Compared to the other types of business organizations the franchise is a fast growing business. The franchise involves the franchisor giving the franchisee the rights to use a trade secret, a mark or any other confidential information or intellectual property of the franchisor. This will also involve a situation where the franchisor that has been registered as the user of the other person’s intellectual property shall grant the franchisee such rights to use the intellectual property. One thing that you may need to understand is that a franchise is not a service contract, an agency or a partnership between a franchisor and the franchisee. In fact the franchisee will operate its business that is separate from that of the franchisor.

How do you define a franchisor?

A franchisor is basically a person that grants a franchise to a franchisee and this will include a master franchise with regards to the relationship that it has with a sub-franchisee or unless it has been stated in the Franchises Act 1998. The franchisor will provide advice to the franchisee on setting up as well as the running of the business. They will also assist in the supply of the material and service, training and business, technical assistance as well as marketing. The franchisor will have the right to administer the continuous control during the franchise term over the franchisee business operation and this will also be in accordance with that of the franchise system.

How do you define a franchisee?

A franchisee is basically a person that has been granted franchise, the franchisee will include a master franchisee with regards to the relationship that it has with the franchisor and that of the sub-franchisee and the relationship it has with the master franchisee. There are also some franchisors that grant rights to a person to a sub franchise to another person at their own expense. The person that is granted such rights is known as the master franchisee.

What is the purpose of a franchise broker and what are the requirements to be one?

A franchise broker is basically an agent or representative of a franchisor that sells a franchise to any person for a certain consideration. A franchise broker can either be a company or an individual but it does not include any director, employee or officer of the franchisor or franchisee.

And if you want to be a franchise broker there will be some certain qualifications that a person has to meet. So for example an individual that intends that be a registered franchise broker must be a Malaysian citizen and they must have experience in the franchise management or in such a related field. The individual must also have a bachelor degree or its equivalent with a minimum of 3 years experience in the industry. However if the individual only possesses a diploma or its equivalent, then they should have at least 5 years of working experience. While those that do not have any form of qualification then they will need at least 10 years of working experience in the franchise management.

You will also need to register as a franchise broker, and you are required to submit Form BAF 5 along with certified copies of your identity card, employer’s referral letter as well as academic qualification certificates. If it is a company that intends to register as a franchise broker then it must be registered under the Company Act 1965. The key executive must then have the minimum qualifications of the individual applicants as mentioned earlier. Form BAF 5 will then need to be submitted and they must be accompanied with the true certified copies of the company or the service profile, Form 49, Form 24, as well as the background of each of the board directors and key executives so that they can confirm the qualification and experience in the franchising industry.

You should also take note that the franchise broker is only valid for one year from the date that you registered. And it is best recommended that you renew at the Registrar of Franchise 30 days before the last effective date of the registration together with the prescribed renewal fees.

What are the advantages of franchising?

If you begin your business with franchising you will find that to acquire start-up funds is much easier, this is because the franchisor will supply the know-how, initial capital investment as well as experience. However to expand the network, the supplemental capital investment will usually be provided by the franchisees. With the investment from the franchisees, the business outlets will not only be established in a relatively short time but the trademark or the brand name can also be enhanced.

The franchisees will also have the advantages of the franchisor and the rapid expansion of the franchise network will only work in the favor of the business as the consumer’s will recognize and easily understand the service of the product and create recognition as well as the value of that particular trademark. Not to mention that the essential service and support will be provided by the franchisor to the franchises so that they can become competitive n the market and operate a profitable business. The franchising will also offer the franchisee exclusivity within a particular area and the franchisee has a direct and continuing financial interest in the business as opposed to the employed managers.

What are the disadvantages of franchising?

Franchising is only limited to that one particular product or service that is controlled by the franchisor. As for the franchisees the may find that they are loosing their individual management freedom as they are operating the business under the franchisor’s business format, shared trade identity as well as the management system. Another thing that you need to be aware of is that the franchisor’s revenue is based on the gross sales of franchisees and this means that the franchisees have to pay an up front fee as well as on going royalty to the franchisor for the grant of the franchise that will include the cost of the franchisor’s research and development, pre-opening assistance and research.

What should a foreigner who wants to sell their franchise in Malaysia do?

According to section54 of the Franchise Act 1996, for foreigners that wish to sell their franchise here in Malaysia they must first apply to the Registrar of Franchise by way of letter. In the letter you must state the name of your company, the type of franchise business that you are running, the company that is buying the franchise, the number of existing outlets and if identified.

What should I do if I’m a local franchisor that is planning to sell the franchise to a foreigner?

According to section 54 of the Franchise Act 1998, a franchisor that wishes to sell its franchise to a person that is not a Malaysian citizen then they must first obtain approval from the Registrar of Franchise. You should also take note that you may be subjected to certain conditions that is imposed by the Registrar. The procedure is the same as the foreigner who wished to sell their franchise in Malaysia, you are still required to write a letter to the Registrar and in the letter you must include information such as the name of the company, the number of existing outlets and the company that intends to buy your franchise, if identified and the type of the business franchise you are running.

What are the procedures for registration of the franchisor or master franchisee or franchisee to the foreign franchisor?

The begin the process in this particular procedure you must first submit your application in Form BAF 2 and the Disclosure Document in Form BAF 1 that is accompanied by the relevant certified true copies of documents as well as the appropriate fees. You should also take note that there will be a one time fee of RM1, 000 for the franchisor or the master franchisor or the franchisee to the foreign franchisor and a fee of RM50 will also be imposed. If there are any form of amendment to the documents then you will be charged RM50 for the application.

The payments must be made using either money order or postal order, take note that payments in the form of checks and cash are not allowed. The application that you submit must also be enclosed with documents such as; operation manuals, certificate of incorporation, Form 8 or Form 0 (whichever is applicable), form of annual return of the company having a share capital pursuant to section 165 of the Companies Act 1965, the company’s organizational chart along with the names and position of the key personnel’s, the sample of the franchise agreement, the training manual, form 24 and form 49, the last audited balance sheet as well as the profit and loss account, and the company’s business brochures.

As for the Form BAF 2 and BAF 1 you can obtain them at the Ministry of Entrepreneur Development for free. If your application is successful then the registration of the franchise will continue to be effective. This is of course if the Registrar does not issue a written notice to the applicant or the franchisor to inform them to suspend, prohibit, deny, and terminate the registration of the franchise. An annual report must also be submitted and the applicant or the franchisor can do this by using Form BAF 6 and handing it to the Registrar of Franchise within 30 days from the anniversary date of the registration.

What are the costs that are involved in becoming a franchisee or buying a franchise?

The main objective of purchasing a franchise is to basically associate oneself with that of the company’s or the franchisor’s name. However like any form of investment you should be cautious of what you are getting yourself into. It is important that you do your research thoroughly on the particular business that you are venturing into along with the current state of the industry. This is because when you purchase a franchise, no matter how successful it is that will not guarantee that you will succeed in it and it can also be quite costly as there certain fees which you are required to pay.

Usually a franchisee will have to pay the initial franchisee fees, the fees are non-refundable and it can cost from several thousands to hundreds of thousands. Other things that you will need pay for example may include renovation, insurance, training, legal fees, rent, equipment, initial inventory, research and development, legal fees, centralized accounting and processing services as well as the “grand opening” fee that the franchisor might use to promote your new franchise outlet.

The franchisor royalties are usually based on the percentage on the monthly gross turnover of your franchise. This means that you are required to royalties for the right to use the franchisor’s name and branding, this may be a good idea if the franchisor’s particular branding is strong and has value. The downside to this is that even if your franchise business has not earned sufficient income then you are still required to pay the royalties to the franchisor.

There are even some franchisors that require you to pay advertising funds whereby these funds are used to advertise and attract new franchise owners or customers; however this practice will not normally target your franchise outlet. There will usually be certain percentage that you are required to pay monthly.

When is my company ready to franchise?

There are several important issues that you should consider before you venture into the franchise program. For example you must evaluate your company on several criteria, it is important that you have products or services that are well accepted by the public and they should also be readily adapted to other areas in the country. There should also be a protected trademark that is a valid trademark which means that the licensor’s obligation to control the quality of the licensee’s services and product.

Before you go into franchising, your company should have a number of successful and profitable outlets preferably in several different locations. This will also help determine whether your outlet’s operation is ideal in venturing into the franchising system. You should also have in place a good operating, delivery and marketing system, this is because when you start to expand your business by means of franchising, the elements and factors that made your business successful in the first place must then be teachable to the prospective franchisee.

This being said, your company must then have a complete and comprehensive operation and training manual as well as the business brochure. Your accounting system should be standardized and there should also be a manual for that specific purpose as well. This is because when everything is standardized then your company will be a clear understanding of how to recruit, communicate, train and support the other franchisees, instead of just letting them fend for themselves and watch them as they basically destroy the brand value that you worked hard to build. So an organized quality system control is required in such situations.

As the franchising company you will be basically guiding and assisting a franchisee, so you will not be managing the day to day operations of the businesses. This means that the research and development of the products and services and the complete training program must always be on-going, this is to ensure that the business is of standard and thus will be able to compete in the current market. Periodical promotional program of the products or the service must also be carried out.

There are a lot of things that the franchising company needs to do to ensure that their products and services are not only maintained but continue to increase. As mentioned before, when you sell your rights of the brand so that others can use it, you must be able to assist the franchisee any way possible. This is because while the franchisee is taking a risk in investing in your franchise, you should also not forget that your brand name is also on the line. So you must be there to provide them with technical advisory services on the equipment and the identification of the outlet location. Another thing that must be implemented is the inspectorate services so that the production of quality and standardized products is produced.

It is important that your company has a good business and marketing plan so that you are able to expand your business using the franchising system. You should also put aside sufficient capital so that you are able to not only develop but also implement the franchising program successfully.

Who should I contact if I want more information regarding about this?

If you have any inquiries regarding about the registration of the franchise or you want to submit your application for the franchising system, then you can do so by writing a letter or you can even come personally to the Registrar of Franchise so get more details. Make sure that you have all the supporting documents with you so they can get a clearer picture of your business and help you better with the questions that you might have, however it is also very important that you do your homework about expanding your business using the franchise system.