What is Franchise About?

Franchising is a form of strategy to expand and/or distribute businesses, whereby an owner of a business, product, name or service (“Franchisor”) grants affiliated dealers the right to sell, distribute and/or use such a business, product, name or service (“Franchisees”). In Malaysia, franchising is governed by the Franchise Act 1998 (“the FA 1998”) and its objective is to create a thorough registration system to regulate the franchise business in the country.

What is Franchise?

Under Section 4 of the FA 1998, “franchise” is defined as a contract or an agreement between two or more persons where the following takes place:

1. A Franchisor grants a Franchisee the right to operate a business according to the franchise system during the term of the franchise, both of which are determined by the Franchisor;

2. The Franchisor grants the Franchisee the right to use any intellectual property and/or confidential information owned by the Franchisor, including where the Franchisor, who is either the registered user of or is licensed by another person to use any such intellectual property which allows the Franchisor, to allow the Franchisee to use such intellectual property;

3. The Franchisor has the right to control the Franchisee’s business operation by the franchise system during the term of the franchise; and

4. The Franchisee may be required to pay a fee or some other form of consideration to grant such rights.

For the avoidance of doubt, each franchise term shall not be less than five (5) years, as set out under Section 25 of the FA 1998.

Franchisor and Franchisee

Section 4 of the FA 1998 also provides for the definition of a Franchisor and a Franchisee, which are as follows:

1. A “franchisor” is a person who grants a franchise to a franchisee and includes a master franchisee about his relationship with a sub-franchisee;

2. A “franchisee” is a person to whom a franchise is granted and includes a master franchisee about his relationship with a franchisor and a sub-franchisee with regard to his relationship with a master franchisee and

3. A “master franchisee” is a person who a franchisor has granted rights to sub-franchise the franchise to another person at his own expense (“Master Franchisee”).

In the context of the franchise industry in Malaysia, several key scenarios are shaping the landscape. Here’s an overview of important factors influencing the industry:

1. Growth in Local and International Franchises:

• Local Expansion: Malaysian homegrown franchises like Marrybrown and Tealive have expanded both locally and globally, proving the potential of domestic brands.

• International Brands: Major global franchises like McDonald's, Starbucks, and KFC continue to dominate the market, showcasing a strong demand for established foreign brands.

2. Post-Pandemic Recovery and Digital Transformation:

• The COVID-19 pandemic accelerated digital adoption across the franchise sector. Franchises that adapted by integrating e-commerce, delivery services, and online marketing platforms saw faster recovery post-pandemic.

• Franchise systems are increasingly adopting technology such as cloud-based management systems, mobile apps, and AI-driven marketing strategies to enhance customer engagement and streamline operations.

3. Support from the Government:

• The Malaysian government, through initiatives by Perbadanan Nasional Berhad (PNS), offers financial and developmental support to foster the growth of local franchises.

• Franchise Act 1998: Provides a structured regulatory framework that helps protect both franchisors and franchisees. Compliance with this act is crucial for businesses aiming to operate within the franchise model in Malaysia.

4. Franchising in Emerging Sectors:

• Beyond traditional food and beverage franchises, sectors like education, health and wellness, beauty, and automotive services are seeing increasing franchise opportunities.

• This trend reflects the diversification of franchise opportunities beyond F&B and retail, offering entrepreneurs more options to invest.

These scenarios outline how the franchise industry in Malaysia is evolving, presenting opportunities and challenges for businesses operating or planning to enter the market.