What is a Franchise

Based on the definition provided by the European Code of Ethics for Franchising, “franchising” means “a system of marketing goods and/or services and/or technology, which is based upon a close and ongoing collaboration between legally and financially separate and independent undertakings, the franchisor and its individual franchisees, whereby the franchisor grants its individual franchisee the right, and imposes the obligation, to conduct a business in accordance with the franchisor’s concept”[1].

The franchise industry is expanding rapidly across the globe, and it is important to note that the franchise sector in Malaysia is governed by specific laws and regulations. The Franchise Act 1998 (Act 590) (the “Franchise Act”) is the main legislation governing the franchise businesses in Malaysia. The Franchise Act applies to all the sale and operation of franchise activities in Malaysia[2]

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[1] https://eff-franchise.com/code-of-ethics/

[2] Section 3(1) of the Franchise Act

Main Characteristics of a Franchise

Under the Franchise Act, the statutory definition of “franchise” is a contract or an agreement (written, oral, expressed or implied) entered by two or more persons whereby[3].

(a)    the franchisor grants the franchisee the right to operate a business under its system for a specified term;
(b)    the franchisor allows the use of its trademark, trade secret, intellectual property, or confidential information;
(c)    the franchisor retains ongoing control over the franchisee’s business operations; and
(d)    the franchisee pays fees or other consideration in return for the rights granted.

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[3] Section 4 of the Franchise Act

Who is a Franchisor

Franchisor is defined under the Franchise Act as “a person who grants a franchise to a franchisee and includes a master franchisee with regard to his relationship with a sub-franchisee”[4].

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[4] Ibid

Registration of Franchisor,Foreign Franchisor and Franchise

Franchisee is defined under the Franchise Act as “a person to whom a franchise is granted and includes… (a) a master franchisee with regard to his relationship with a franchisor; and (b) a sub-franchisee with regard to his relationship with a master franchisee”[5].

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[5] Ibid

Registration of Franchisor,Foreign Franchisor and Franchisee

Before any franchisor can operate or sell a franchise to any Malaysian or in Malaysia, the franchisor must register the franchise under the Franchise Act[6]. Such registration may take between 1 to 3 months upon submission of the requisite documents to the authority[7]. However, the stipulated timeline is just a general guide, and it may vary for each application depending on the complexity of the application, backlogs of the authority, or manpower issue. In certain situations, the registration process may take more than 6 months. It should also be noted that the Franchise Registrar may conduct an interview with the applicant in relation to the application in order to obtain a better understanding of the franchise business.

In the case of a foreign franchisor, prior approval must also be obtained in addition to the registration requirement under the Franchise Act[8]. Further, any franchisor who intends to sell a franchise business to a non-Malaysian, the relevant approval under the Franchise Act must be obtained as well[9].

In relation to franchisee, a franchisee that has been granted a franchise is required to register the franchise with the franchise registrar together with the prescribed documents and fees[10]. The registration of a franchisee can only be made after the registration of the franchisor has been approved, and such registration can only be carried out by the franchisor[11]. Therefore, in practice, each franchisee should approach its franchisor to submit the franchisee application on its behalf and to ensure that the franchise registration has been duly completed by the franchisor.

In practice, franchise registration applications may presently only be submitted by franchise consultants approved by the Ministry of Entrepreneur and Cooperatives Development (as listed on https://myfexv2.kuskop.gov.my/carian-konsultan). Accordingly, franchisors are generally required to engage franchise consultants to assist with the preparation and submission of the required documents, compliance with regulatory requirements, and liaison with the relevant authorities throughout the registration and approval process.

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[6] Section 6 of the Franchise Act

[7] https://myfexv2.kuskop.gov.my/faq

[8] Section 54 of the Franchise Act

[9] Section 53 of the Franchise Act

[10] Section 6A and Section 6B of the Franchise Act

[11] https://myfexv2.kuskop.gov.my/faq

Franchise Validity

A franchise registration is valid for a term of 5 years[12] and it must be renewed no later than 30 days from the expiration date of the franchise registration[13]. The renewal process may be commenced 6 months prior to the expiration date[14].

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[12] Section 25 of the Franchise Act

[13] Section 10A(1) of the Franchise Act

[14] https://myfexv2.kuskop.gov.my/faq

Franchise Application Documents

For the purpose of franchise registration application, the following are some of the key documents that are typically required to be prepared[15].

(a)    trademark registration of the relevant franchise in Malaysia;
(b)    franchise agreement;
(c)    franchise disclosure document;
(d)    franchise operation manual;
(e)    franchise training manual; 
(f)    audited financial statement for recent 3 years; and
(g)    other documents required as per the checklist provided by the authority. 

It is important to note that the certificate of registration of trademark must be issued by the Intellectual Property Corporation of Malaysia in relation to the relevant franchise prior to the franchise registration. Any trademark application which is pending approval in Malaysia will generally not be accepted. In addition, generally it must be proven that the franchisor has at least 3 years of experience in the specific field of the franchise business.

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[15] Sections 7(1) and 24 of the Franchise Act

Conclusion

As discussed above, the Franchise Act imposes various registration, approval, and compliance requirements that must be satisfied before franchise operations may commence in Malaysia. Accordingly, businesses intending to expand into Malaysia through franchising should ensure that adequate preparation and planning are undertaken at an early stage in order to facilitate a smoother registration and approval process.

Authors: Hiroyasu Umeda, Teo Sze Yi, Ch'ng Zhen Hon and Ryoki Izumi