What is Franchising?
Franchising is a method of marketing and distributing product or services based on a two party relationship; that is the franchisor (owner and granter of rights) and the franchisee (recipient of rights). The right/s granted by the franchisor to the franchisee is for the purposed of running the business by using the trademark or trade name based on specific system, at specific location or are within a specific period.
Franchising can also be thought of as a pooling of resources and capabilities. The franchisor contributes the intial capital investment n developing the business know-how and experience while the franchisee contributr the supplemental capital investment, effort and operationg experience in veriaty of market.A modern franchise includes a format for a conduct of a business, a management system for operating the business and a shared trade identity.
Franchising is a business method and relationship, not an industry. Franchising is the predominant business relationship in many industries and business segments and is becoming more common in others.
Franchising in Malaysia
Franchising in Malaysia started way back in 1940s with Singer and Bata ( a shoe manufacturer and distributor), followed by automobile and petrol station dealers. However, it was only noticed by thr public when fast food quick service restaurant such as A&W (1963), KFC (1970), and McDonalds (1981) commenced operations and expanded rapidly in the country.
On the other hand, Malaysians have long practised a concept almost similiar to the franchise system known as “pawah”. The system gives one the right to utilised agriculture or breeding farms. Trough this system, the landlord/land owner gives the operator the right to farm the agriculture land or to breed livestock on it. As a reward, both parties enjoy thier share of the partnership based on mutual understanding or an informal agreement. Normally this “pawah” system does not rely on any written agreement and its sometimes extends over several generations.
The development of modern homegrown franchises started in the early 1980s mainly in the sectors of food (Sate Ria, Marrybrown), automotive (EON), petrol stations (PETRONAS) and crafts/gifts (Royal Selangor). Majlis Amanah Rakyat (MARA) was given the task to facilititate and develope the homegrown franchise develoment initially.
Franchise Development Programme
The Franchise Development Programme (FDP), which was established by the goverment at the end of 1992 through the implementation and Coordination Unit of the Prime Minister’s Deparment (then transferred to the Ministry of Entrepreneur Development) was the major turning point in stimulating the to produce more Bumiputera entrepreneurs, one of the main agendas of the National Development Plan, whose objectives are:
- To increase the number of entreprenuer as franchisors, master franchisees and franchisees;
- To develop homegrown products and services into franchise business
However, implementation was no easy task. Franchising was relatively new in Malaysia, and as such there where numeros experimental and teething problems.Therefore , the Ministry of Entreprenuer Development with the cooperations of the Malaysian Franchise Association and other related agencis actively promoted educational program such as seminars, conference, training and course on developing and managing franchises.
Franchise Act 1998
The enforcement of the Malaysian Franchise Act 1998 has opened a new era in the development of franchising in Malaysia. The existence of the Act, among others is aimed at creating a systematic registration system to oversee a well managed and healty growth of the franchise business in Malaysia.
The existence of the Franchise Act has evoked different reactions from supporters of the Franchise Act has evoked different reactions from supporters of the franchise industry both locally and abroad for the implementation and enforcement of the act. There are others with the opinion that the existence of the act will increase red tape and possibly hinder the growth of the country’s franchise industry.
However, judging by the background and progress of the industry in the country, the existence and enforcement of the law is something that is highly essential based on the following:
- The development of the franchise business in Malaysia, especially home grown franchises is still in its infancy. It is unavoidable that misconceptions therefore exits, possibly due to the lack of knowledge, experience and expertise in the field. Thus with the Act in force, it is hoped that future franchisor, master franchisee or franchisees have guidance on basic matters that must be analyzed and addressed before getting involved in the business.
- There have been cases of misconduct encountered by Ministry of Entrepreneur Development and the Malaysian Franchise Association inclined in the form of fraud, attempts at deception and discrimination in the negotiation process. Though the number of cases is still small, no action has been taken to curb these action.It is very likely if left unchecked, these practices will spread and destroy the good reputation of the franchise business while at the same time causing goverment organized programmes such as the Franchise Development Programme deception and discrimination in the offer of franchise business sales and prevent the distrinution of disclosure document that contain confusing and inaccurate information or that exclude important information to the future franchisees.
- The Act encourages good business practices such as, the responsibilty to be cautious and the responsibilty of fiduciary, besides protecting the system and the franchisor’s copyright from being duplicated.
- In Malaysia, the government’s direct involvement is apparent with implementation of the Franchise Development Programme in 1992. Such an effort is not found elsewhere, either in the West or in other Asian countries. The government of Malaysia has given its full commitment in promoting and encouraging the growth of the franchise business as an entreprenuer development agenda. Thus it would be inappropriate if the govement is not given the appropriate powers to supervise and monitor the growth of the industry.
Assessing Disclosure Documents
Based on the observation and experience of the Malaysian Franchise Association, among the factor leading to the problem faced by the franchise entrepreneurs, specifically franchisees, are those due to the attitude of taking thing for granted, being to hasty or easily excited at the initial stage starting up the franchise business. These attitudes will only lead a franchise entrepreneur to jump into the business without first investigating a conducting proper research. There were those who never studied the offer or disclosure documents or even requested for them before making a commitment.
Disclosure document are compilation of complete documents for the purposed oa an offer of a franchise to a franchisee. The main topics in disclosure documents as outlined by the Malaysian Franchise Association are follows:
- Name of Franchisor
- Date of company incorporation of business registration
- Franchisors trade mark or service mark
- Nature of franchor business
- Nature of franchise business
- Franchisor business experience
- In the franchises field
- In other business areas
- Date of offer (Franchisor to Franchisee)
Particular of Persons Involved
- Names, appointment and experience of members of the Board of Directors and Senior Executives.
- Information in respect of the Management Company that manages the franchise on behalf of the franchisor.
- Any legal proceedings that have been taken or are being taken againts the franchisor.
Bankruptcy or Winding up
- Whether the franchisor has any record of bankrupcy or winding up.
Franchise Fee and Other Initial Fees
- Type and amount payable by the franchisee
- Time of payment
- Whether such payment are refundable
Other Financial Obligations
- For each type, specify, amount, time of payment and either refundable or otherwise
- Advertising fee
- Training Fee
- Service Fee
- Lease & Other fees
Franchises’s Preliminary Investments
Initial investment by the franchisee include:
- Real estate property
- Fittings and fixtures
- Construction and renovation cost
- Initial inventory
Franchisee’s Obligation to Purchase or Lease of Specific Material/Equipment from the Franchisor or Fixed Sources.
- Whether the franchisee is requird to purchase specified equipment or raw material from the franchisor
- Whether the franchisee is requird to purchase specific equipment or raw services from a specified supplier
- If required, state the terms and conditions and the types of goods or services as required
- State the franchisor’s or the supplier’s basic revenue from the sales and supply of the products / services
Franchisee’s Obligation to Purchase or Lease any Specific Material Equipment in accordance with any Specification
- Whether the franchisee is required to purchase or lease any specified product or service in accordance with any specification.
- Whether any renovation or alteration to those specification is allowed.
- If allowed, state the renovation or alteration procedure.
- Whether financial support is provided by the franchisor or its agents.
- Whether the franchisor supplies or sell any specific equipment
- Whether any payment is imposed by the franchisor for the facilities provided
- Franchisor’s obligations prior to the opening.
- Franchisor’s obligations during operation.
- Selection of site
- The period between signing of agreement and commencement of operation
- Initial training
- Place, duration, and course content
- Training fees and expenses payable by the franchisee
- Refresher training
- Whether territorial right are given
- Whether the franchisor is allowed to operate within the allocated territory using similar or different names
- Factors that may influence the variation of territory
Trade Marks and Intellectual Property Right
- Franchisee’s right to use the trade or service mark and any other intellectual property rights
- Other terms on patents and copyright
Whether the Franchisee is Required to Dedidcate his Full Time on the Franchise Business
- Whether the franchisee is required to dedicate his full time to the franchise business
Restriction on Sales of Specific Good / Services by Franchisee
- Wheather there are specific good or services that are not allowed to be sold or rendered by the franchisee
Renewal, Termination, Repurchase, Modification
- Initial term of agreement
- Condition of renewal
- Termination by franchisee
- Termination by franchisor
- Franchisor / Franchisee’s obligation upon termination
- Renovation by franchisor/ franchisee
- Death or incapacity
- Number of franchisee(s) operating in the last fiscal year
- Address(es) of Franchisee(s) currently operating
- Whether any franchisee has benn terminated during the last fiscal year
- Whether the franchisor gives actual, average or projected financial forecasts
Information on Franchise Business
- The number of Franchisees operating at the end of the fiscal year
- The address of franchisees in operation
- Whether there has been any franchisee who was terminated at the end of the fiscal year
- Last three years of financial statements of the franchisor Contract
The franchise agreement