PUTIK LADA
By DAMIAN YEO SHEN LI
There is a very fine line between licensing and franchising, and even slightly more control over the way the business is run can make the difference.
I HAVE always been fascinated and impressed with the power of branding and in particular the dynamism and vitality of franchising. When one talks about franchising, marks like McDonald’s, Old Town come to mind. It is, however, not known to most people that these marks which are seen everywhere may not be as a result of franchising.
It is also possible to have such marks through the good old licensing system: licensor grants licensee the right to use its mark; licensee sets up shop under such mark, which also typically comes with a concept designed by the licensor Although franchising and licensing sound similar, there are actually differences between the two systems.
For a start, franchising is regulated in Malaysia, and one would have to be registered (be it the franchisor or franchisee; except that there are more regulations with regard to the franchisor). The history of franchising goes back to the mid-19th Century when Isaac Singer made improvements to an existing model of a sewing machine and wanted to increase the distribution of his sewing machines.
His effort was among the first franchising efforts in the United States. Thereafter, many other franchises were developed such as John S. Pemberton’s Coca Cola, Roy Allen and Frank Wright’s A & W Root Beer Restaurant Chain and Ray Kroch’s McDonalds.
The primary difference between a licence and franchise situation is the amount of control that the franchisor or licensor exercises over its franchisees and licensees, respectively. Pro-franchisors have always argued that a franchisee is much like the purchaser of a security. This is so as the franchisor usually sets out all in relation to the business and the franchisee usually only has to do all that is stated in the franchise agreement and operation manual, and it will be profitable.
It is in this regard that franchising be registered, and under the law there must be disclosure of risk to the potential franchisee. A licensor does not tell the licensee how to accomplish his goal of making profits. The licensee is an independent contractor who can do anything he wants, i.e. run his licensed business in the manner, time and equipment of his choosing to make profit. As such, the profit onus is on the licensee and not the licensor.
It should be noted that the line here is very fine – if there is even slightly more control over the way the business is run, a licensee/licensor may slip into the franchising area, and in this relation there would then be the possibility that franchising laws have not been complied with. Another difference between a franchisee and a licensee is that franchisees can expect to have a much closer relationship with their parent company than their licensee counterparts.
As franchisees are the public face of the franchisor company, franchisors usually provide a certain level of training and support to franchisees and their employees.
Franchisees can also expect a certain amount of territorial exclusivity as well as control over the products and services they offer.
Whereas in most cases of licensor/licensee, the licensee does not retain rights to use the company’s trademark; instead, the licensee is expected to establish its own identity in the marketplace.
Also, licensees usually do not receive exclusive territorial rights. This means that the licensing company is free to sell similar licenses and products to other people in the same geographical area.
On the upside, licensing businesses are often less expensive than franchising ones in both upfront investment and ongoing fees.
Once the licensee launches the operation, the relationship with the licensing company is frequently limited to purchasing products, whereas franchisees are usually expected to pay royalties – franchising fees. It may help to know that our authorities have set aside RM300mil to develop the franchise industry. Just last week at the opening of Franchise International Malaysia 2009, the Domestic Trade, Cooperatives and Consumer Minister remarked that Perbadanan Nasional Bhd (PNS) aimed to produce 50 franchisors and 1,000 franchisees by the end of the year.
So far, the authorities, through PNS and other franchise agencies, have supported 18 franchisors and more than 380 local franchisees in Malaysia.The minister acknowledged that the amount set aside to develop the franchise industry had not been fully utilised as there was a lack of knowledge and awareness among the entrepreneurs in the country, and in this relation, he highlighted that it would work on dissemination of information on the industry.
For those thinking of becoming a business owner, there is all that challenge of new roles and responsibilities in the change from employee to owner. In addition to issues such as managing employees, maintaining records, new business owners are faced with the hardest challenge – that of having to market their product/services.
There is always the possibility that if it is not done well, and if the product/service is not welcomed by the public and there goes one’s life savings.
As for franchising, although it costs more, the concept and the business techniques are ready. Owing to the franchising laws in Malaysia, as there must be disclosure made by the franchisor, the risk for the new business owner is somewhat calculated. The writer is a young lawyer. Putik Lada, or pepper buds in Malay, captures the spirit and intention of this column – a platform for young lawyers to articulate their views and aspirations about the law, justice and a civil society. For more information about the young lawyers, visit www.malaysianbar.org.my/nylc.
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