These days, we can’t go anywhere without seeing a McDonald’s® or Starbucks®. It is no surprise then that the Malaysian Franchise Association (MFA) reports that the business sector with the most franchises in Malaysia is the food and beverage sector. This is followed by the subsequent sectors: services; education; clothing and accessories; beauty and health; IT and communication; retail; and others.
Franchising your business, while loaded with opportunities for growth, is certainly a challenge. Not everyone can be a good and efficient franchisor. The same can be said for franchisees. Interestingly, the International Franchise Association (IFA) claims that those above 50 years of age make good franchisees. The reason for this being, they possess three critical skills needed to be a successful franchisee: confidence, the ability to plan and strong interpersonal skills. IFA further supports their claim stating that, “Having been adults for at least three decades, they clearly understand that anything in life worth having takes hard work and effort. They’re realists.”
However, regardless of how skilful a franchisee or franchisor is, there are technical areas and legal rights to which both parties must pay attention, to avoid his or her franchise being considered unlawful in Malaysia.
What’s the first step to starting a franchise in Malaysia?
The franchise industry in Malaysia is regulated by the Franchise Act 1998 (“the Act”). The provisions of the Act apply to the sale of any franchise in Malaysia (either local or foreign), whereby the franchised business operates in Malaysia. All franchises operating in Malaysia have to be registered with the Franchise Registry.
To register a franchise with the Franchise Registry, the following documents or information must be submitted to the Registry by the franchisor:
- A Franchise Agreement, compliant with the Franchise Act
- Operation Manual
- Training Manual
- Certificate of Incorporation
- Forms 24 and 49 (Company’s return as to the Board of Directors and the Shareholders)
- Form of Annual Return of a company having a share capital
- Past three (3) years of audited balance sheet and profit and loss account
- Five (5) year franchise financial projection
- Certified true copy of Registered Trademark or Trademark Application filed with the Intellectual Property Corporation of Malaysia (MyIPO)
- Company’s organizational chart, together with the names and positions of key personnel
- Company’s business brochures
- Photographs of Prototype Outlet(s)
- Bankruptcy search results for the Directors
- Other details such as unique selling point, marketing strategy, supporting technology, etc.
If the documentation is insufficient, the Registrar has the discretion to request for more information or documents.
We also need to prepare a Disclosure Document for the franchisee.
What is a Disclosure Document?
A Disclosure Document comprises of documents that have to be made available by the franchisor to the franchisee at least 10 days before the franchisee signs the franchise agreement. The Disclosure Document provided to the franchisee must be identical to the documents submitted to the Registrar.
Much of the information specified in the Franchise Agreement overlaps with the information in the Disclosure Document to a certain extent. It is therefore advisable to have the Disclosure Document and the Franchise Agreement prepared at the same time to ensure that the information in both documents is kept identical.
A word of warning is required at this stage! Franchisors need to check and ensure that the details provided in the Disclosure Document are accurate as they can be found to be committing an offence if there are any misleading, untrue or fraudulent statements in the Disclosure Document.
How long does the franchise registration process take?
The entire application and franchise registration process can be completed in as quickly as 2 months or may take up to slightly over than 6 months in certain cases. The Registrar of Franchise has the power to approve or refuse a franchise registration. Be that as it may, in the event the franchise is refused, the Registrar must furnish a reason for the refusal.
Where can I get franchise support services?
At KASS, we provide extensive support and professional consultation to Franchisors and Franchisees by:
- Drafting Franchise Agreements which are compliant with the Act as the Act stipulates that a franchise agreement must contain basic clauses, without which the agreement will be considered null and void;
- Amending existing Franchise Agreements to ensure they are compliant with the Act;
- Preparing the Operation Manual and Training Manual according the Standard Operating Procedures of the Franchisor;
- Preparing the Disclosure Document needed for the Franchise Registration;
- Preparing the forms and other required documents for the registration of the franchise with the Franchise Registry; and
- Providing advice to Franchisors and Franchisees.
On the whole, the specific requirements of the Franchise Act must be taken into account when the franchisor is preparing the documentation needed to register its franchise in Malaysia, be it the Disclosure Document, the Franchise Agreement, or anything else. You want to make sure you know exactly what you are getting yourself into (e.g., knowing the difference between a Franchise Agreement and a License Agreement) so you do not get blindsided. As technical and dull as the preparation of such documents may be compared to the actual job of opening the outlet, training the staff and running the franchise, you do not want to be caught out by simple technical issues and problems that could have been avoided!
Examples of popular Malaysian franchises:
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