Starting a Franchise Business in Malaysia
What is a Franchise Business?
The idea of “franchising” is defined as a method for expanding a business and distributing goods and services through a licensing relationship. Precisely speaking, a franchise business is a business in which the owners (also known as “franchisors”) sells the rights of their business that includes logo, name, and model to third-party retail outlets or third-party operators, which is also called “franchisees”. Franchises are a very common way of expanding business. We can easily find the examples of well-known franchise business models in our country like McDonalds and Subway.
How to Start a Franchise Business?
Having a franchise business can be a roadmap to profitable business ownership. Many people find that they can get in on a great idea or successful business that has a proven track record of success and a good brand and reputation, but still run the business themselves. Below are the essential steps to start a franchise business:
- Know your budget
Often, budget is first thing before we set up any business, be it starting a Malaysia business from scratch or having a franchise business. Generally, there is always an upfront franchise fee and certain financial requirements for franchisees. Hence, you need to assess your personal finances and assets before you kick off any franchise business.
2. Research the right franchise business
Knowing what type of franchise business you would go for is another important step in planning to start a franchise business. Do your research, as it will help you to understand and steer your direction in doing business. For example, you can conduct web research, attend franchise event or even reach out to the franchisor and other franchisees. Try to get as much detail and information as you can to about the franchise.
3. Conduct due diligence
Usually, the acquisition of a franchise involves a substantial investment as well as the assumption of certain degree of risk by the franchisee. In this light, having a due diligence is important, as it will help you to assess and examine many factors before acquiring a franchise. Here are the key points that you should include in the franchise due diligence process:
- Explore the opportunities
- Research the franchise system thoroughly
- Understand the Operating restrictions
- Meeting with franchise system representatives
- Visit the franchises
- Consult the professionals [with expertise in franchising] such as a lawyer, accountant and banker
- Understand the statutory business rules and regulations
Another important indicator that can be included in the due diligence is the key performance indicators (KPI’s). A quick web search will show you the most important KPI’s for your particular industry. A thorough background check can be invaluable if it prevents you from taking a bad franchise offer.
The Franchise Act in Malaysia
In Malaysia, the franchise business is governed by the Franchise Act 1998 (the “Franchise Act”) that regulates the franchising industry not only in terms of any franchise agreement but implements a systematic scheme of registration for the Franchisor, Franchisee and franchise brokers. On top of that, the advertising and sale or purchase of franchise are governed by this act. If individual wishes to publish or distribute such an advertisement, he or she must first file a copy of the advertisement at least five days in advance with the Registrar before the first release of such ad.
The Franchise Act applies to all the franchise in Malaysia (whereby the franchised business operates in Malaysia) if it fulfils the following:
- The franchisee operates a business according to a franchise system which is determined by the franchisor;
- The franchisor grants to the franchisee the use of its trademarks and intellectual property rights;
- The franchisor has the right to exercise continuous control over the franchisee’s business operations in accordance with the franchise system;
- The franchisor provides assistance to the franchisee in terms of training, marketing, business or technical assistance and the provision or supply of materials;
- The franchisee pays a fee or some other non-financial consideration in return for the franchise, and
- The franchisee operates business separately from the franchisor. (So, a partnership or agency does not constitute a franchise.)
In addition, the Franchise Act distinguishes clearly between franchisors of Malaysia or any foreign country.
a) Foreign Franchisor
According to the Franchise Act, all foreign franchisors have to gain an approval from the Registrar of Franchises’ before they operate their franchise in Malaysia or if a Malaysian will operate the franchise. Therefore, a foreign franchisor must obtain an approval before he or she carry out negotiations or discussions with any franchises based in Malaysia. In addition to this, the approvals might come with certain conditions as imposed by the Registrar (in accordance with the Franchise Act). Once the required approval is obtained from the authority, a foreign franchisor will be able to sell the franchise in Malaysia (or sell to a citizen of Malaysia).
The main intent behind registration for the local franchisee is to have a control over the franchisee. Please note that in the case the foreign franchise appoints a franchisee as a master franchisee; it will have to register itself as a franchisor before it can grant any further franchisees inside Malaysia or to any citizen of Malaysia. Failure to stay complaint is considered an offence as per the Franchise Act.
b) Malaysian Franchisor
In Malaysia, any franchisor has to register its franchise with the Registrar before granting franchisee licenses to any other individual (if it does not have an exemption from the Minister). It would be an offence as per the Franchise Act if the franchisees were granted without the approval. A franchisor will only be able to apply after three complete years of business operation in Malaysia. That said, once a Malaysia Franchisor is registered, the Malaysian Franchisees of that franchisor is not required to register with the Registrar, as the Registrar will be able to control all the franchisees by controlling the franchisor.