Franchise, An Oft Abused Business Terminology….

I will start off this series by examining at the definition of a franchise. The fact is, “franchise” is an oft abused business term in Malaysia.

For a start, the word franchise is not synonymous with the terms “distributorship” or “agency”. Many Malaysians have used the term “franchise” without really knowing its actual meaning and at times there were parties who manipulated the word to suit their motives. On the other hand, the ignorance of Malaysians on matters pertaining the franchise business model and the provisions of the Franchise Act 1998, are quite appalling.

Caveat Emptor!!!!!

The popular case on point is one that involves a cafe investment scheme that used the term “franchise” in a very misleading way – to promote its business venture and to invite investments. Unknown to many until discovery, the promising business venture turned out to be a cleverly crafted ‘syndicate scam’ – and many innocent parties were deceived by the antics of these unscrupulous “scammers”. It was reported in the media that the scammers collected franchise fees illegally and court action has been initiated against them by the Suruhanjaya Syarikat Malaysia. Sad but true, the scammers have taken advantage of the public’s ignorance and in some ways, leveraged on their greed for making the fast ringgit.

More Cases….

A few months ago, a particular hawker stall in a food court triggered my curiosity – well, I was drawn to the words “Franchise Available” on the stall’s glass counters.

Written in blue marker ink on a piece of white A4 paper, the words were clearly visible to all passer bys.

Few days ago, I saw another stall in another food court with a piece of tarpaulin stating ‘We Are Specialist in Franchising’ in front of their stall’s glass display. I wonder if the stall is franchising its business or they are franchise consultants operating in a food court!!! Either way, I don’t think I will be interested in the franchise offer… but I don’t mind trying out the food!!! (See picture on the right).

Finally, before I wrote this article, I remember some years back, there was a direct selling company calling its business model a franchise but the fact is, it is a multi-level marketing company that are attracting recruits.

The rapid growth of franchise industry has in recent years made the word “franchise” very popular. So, what is a franchise? The most common lay-man understanding is probably, a business that operates under the same name as the others. Yes, a franchise is about businesses operating under the same brand name. But it is far more than that.

In the local context, at least something that I am very familiar with, when people talk about franchise, the first thing that comes into their mind will be that ever popular fast food chain, McDonald’s.

Indeed, McDonald’s or commonly known as McD nowadays, is one of the biggest and oldest franchise organisations in the world today. But how many people really know or understand what franchise or franchising is about in the real business world?

The famous free online encyclopaedia, Wikipedia, puts franchising as ‘the practice of using another firm’s successful business model’. Oxford Dictionaries Online by Oxford University Press defines franchise as ‘an authorisation granted by a government or company to an individual or group enabling them to carry out specified commercial activities, for example acting as an agent for a company’s products’.

Oxford Dictionary of Business and Management also by Oxford University Press further defines franchise as ‘a licence given to a manufacturer, distributor, trader, etc., to enable them to manufacture or sell a named product or service in a particular area for a stated period. The holder of the licence (franchisee) usually pays the grantor of the licence (franchisor) a royalty on sales, often with a lump sum as an advance against royalties. The franchisor may also supply the franchisee with a brand identity as well as finance and technical expertise.’

Enough of academic definitions! To put things in a more practical manner, one has to look if the franchise business model is covered in the law for the day-to-day application. In Malaysia, there is this Franchise Act 1998 (Act 590) which regulates the industry. So, for any activities to be considered as franchise in Malaysia, at least from the legal perspective, one has to understand its interpretation.

The Malaysian Franchise Act 1998, refers franchise as a contract or an agreement, either expressed or implied, whether oral or written, between two or more persons by which—

  1. the franchisor grants to the franchisee the right to operate a business according to the franchise system as determined by the franchisor during a term to be determined by the franchisor;
  2. the franchisor grants to the franchisee the right to use a mark, or a trade secret, or any confidential information or intellectual property, owned by the franchisor or relating to the franchisor, and includes a situation where the franchisor, who is the registered user of, or is licensed by another person to use, any intellectual property, grants such right that he possesses to permit the franchisee to use the intellectual property;
  3. the franchisor possesses the right to administer continuous control during the franchise term over the franchisee’s business operations in accordance with the franchise system;
  4. the franchisor has the responsibility to provide assistance to the franchisee to operate his business including such assistance as the provision or supply of materials and services, training, marketing, and business or technical assistance;
  5. in return for the grant of rights, the franchisee may be required to pay a fee or other form of consideration; and
  6. the franchisee operates the business separately from the franchisor, and the relationship of the franchisee with the franchisor shall not at anytime be regarded as a partnership, service contract or agency.

One thing that I would also like to emphasis here is that, the Franchise Act 1998 interprets “franchise agreement” as a contract or an agreement made between a franchisor and a franchisee in respect of a franchise in return for any form of consideration but does not include any contract or agreement made for the purpose of direct selling as provided by the Direct Sales Act 1993 (Act 500). This might make it illegal for the direct selling company I mentioned earlier to call its business model a franchise.

Well, so much of legal language. To round it up in a layman term, I would put franchising as a formal act of two separate entities in which one party (franchisor) grants the rights to use its identity that has commercial value, such as brand name, to another party (franchisee) for a period of time and at a specified area. The franchisee will also need to operate the business in a way or under a system that has been determined and/or agreed by the franchisor and pays the franchisor some benefits in return. The three components that have to exist here are:

  • Identity
  • System
  • Return, usually in monetary form.

You may ask, why would these people want to get involved in such an arrangement? Well, that will be answered in the next issue!!!

This article was first published in Business for Sale Magazine Issue No. 22 Sep/Oct 2011

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