Franchising & Licensing – Know The Differences

Malaysia Business owners often get confused about Franchising and Licensing. Both of them are considered as a means of business expansion method undoubtedly but their differences should be taken into deep consideration before selecting an expansion method. While all franchisees are in effect licensees, not all licensees are franchisees.

Franchising and Licensing come from two distinct areas of laws. In Malaysia, Franchising is regulated by the Franchise Act 1998 while Licensing is a form of Contract Law. In other words, if one takes up Franchising as a means of expanding a business, then compliance with the aforementioned Act is necessary and it also requires registration with the Ministry of Domestic Trade, Co-operatives and Consumerism. On the other hand, Licensing is a merely a contract between two independent parties.

Business owners have often gotten Franchising and Licensing mixed up as both share the similarity of lending a brand name to another party to run the business. The brand name is an essential part of both methods because the brand which is being franchised or licensed should already be a recognised brand name and it should come with an existing customer base.

What makes Franchising different from Licensing is the extent of control to the business operation. In every franchise arrangements, the franchisor will grant the rights to the franchisee to use the trademark and business model that have been successfully tested and refined. Once the franchisee pay a sum of fees on top of the rights granted, the franchisee will enter into a franchise agreement that outlines the rights and obligations of both parties. A degree of various controls will be exerted to the franchisee as the franchisor will need to make sure the business is run in accordance to the business model. Any changes are subjected to the approval of the franchisor.

One must understand the nature of a franchise business before entering into one as franchisor will exercise significant control to its franchisee to ensure uniformity and consistency. But of course, the franchisee will also be equipped with initial training and ongoing assistance from the franchisor aside. Franchisee will be benefited from the marketing and advertising support provided by the franchisor. Generally in a franchise relationship, there are two elements that go hand in hand – significant control and ongoing assistance from the franchisor.

Meanwhile, for some business owners, they tend to think that their business expansion method is in the form of a franchise but their operating methods do not imply the franchise system. These business owners actually resemble licensors, when they grant the right (for a fee) to an external party to use their trademark and run their business, not necessarily following the licensor’s business format exactly.

Licensing appears to be more affordable than Franchising because the license is all that is purchased, not the entire business model so there are no marketing or training fees involved. A licensor does not exert significant control and does not require the licensee to pass off all decisions to the licensor.

Nevertheless, all parties involved in Licensing should be cautious as it can easily be disguised as a Franchising method by the poor draftsmanship of the agreement or in the inappropriate use of a business format. It does not matter if you recognise your business method as Licensing. But if the licensed business slips into the franchise ground, it should immediately comply with the Franchise Act 1998 or be readjusted to maintain it as a licensed business. It is not the semantic that counts but it is what constitutes the business method.

Franchising vs. Licensing

Franchising

Licensing

Complete business package (including technical know-how) will be shared with the franchisee. Only brand name will be shared with the licensor.
Continued assistance and guidance must be provided by the franchisor to the franchisee. Only the technical/product knowledge training will be given at the beginning by the licensor and then it is up to the licensee to run the business on his own.
Bounded by the Franchise Act 1998. Governed by the Contract Law.
A franchise agreement has to be at least five years long. A licensing agreement generally lasts less than five years.
Compulsory to register a franchise. No legal requirements for registration.
Only available to business that have been operating as a Sdn Bhd for at least three years. Sole proprietors can also opt for licensing.
A stringent franchisee selection process is usually done. The licensee selection process is usually less stringent than the one done for franchisee.
Must have a registered trademark ® Not necessary to secure a registered trademark ™

 

Conclusion

  •  Whichever option that you may choose, you have to understand that business expansions require hard work, dedication and often sacrifice.
  • It will be a long-term commitment with your franchisee/licensee so every effort put in will ensure that the relationship is successful and profitable; making it worthwhile at the end of the day.
  • Most importantly, get an experienced franchise lawyer to draft the appropriate agreements for you.


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