7 Key Differences between Franchising and Licensing in Malaysia
| 7 Keys | Franchising | Licensing |
|---|---|---|
| Formal Requirements | The main requirement of a franchise is that you need to register your franchise before you can sell and operate a franchise business. There are also other strict requirements under the Franchise Act 1998 (“the Franchise Act”) that you must comply with, including the inclusion of main terms in a franchise agreement, the filing of financial reports and disclosure documents.
With the recent amendment to the Franchise Act, it is now an offence for a franchisee who fails to register the franchise, and the franchisee will need to display the certificate of registration at the place of business. |
Very few requirements on how you can deal with the license. There is no specific laws for licensing that put that set out what you need to have in a license agreement and how you need to give your rights to others.
The laws that govern the relationship between a licensor and licensee is the Contracts Act 1950. It only covers very broad and general requirement on the general principles of contract like fairness and reasonableness. |
| Complexity | For a franchise, the franchisor must develop a comprehensive franchise system and providing ongoing training and assistance to the franchisee in running their business.
In addition, there are also other ongoing compliances as dictated under the Franchise Act, for instance, the renewal of franchise and the submission of annual report. |
In comparison with franchising, licensing offers a relatively simpler and easier entry. Parties just need to decide what are the matters they want to license for. |
| Control | You have a high level of control how others will operate the franchise business. For examples, you can dictate how the standard operating procedure in shutting the doors, how to clean a table and etc. | You have less control over a licensee. Most of the time, licensee decides how they want to market and sell their products and services. |
| Flexibility | The Franchise Act protects the franchisee by prohibiting the franchisor to have terms that are discriminatory against other franchisee. If the franchisor decided to have very different terms, he must be able to justify why he is doing so. | It is more flexible to decide what the licensing terms between the parties are. Some of the terms can be designed to suit a particular licensee. |
| Finance | You need to prove that you have a good financial standing in running the business to attract your franchise prospect. It is also a requirement under the Franchise Act that you must already running at least one outlet for a minimum of 3 years before you register a franchise.
The costs of preparing the franchise related documents (operational manual, training manual and franchise agreement). |
As long as you are able to convince a licensee on the products or services you wanted to license, the term is flexible.
Principally, you would need a licensing agreement, and such costs would be generally lesser than the costs to set up a franchise. |
| Term | The minimum term for a franchise is 5 years. | There is no minimum term for a license. The parties will decide how long the duration is. Generally, it will be a minimum of 2 years. |
| Renewal | The Franchise Act protects the franchisee not only that the franchisor should renew the franchise but also the renewal terms must be almost the same with the previous franchise agreement. | As for a license, the parties are flexible to decide when the contract will expire and the renewal terms. |
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