To franchise, or not to franchise?

 

Franchising has become the fastest growing way of doing business, but is this the only option?

So, Loob Holding recently lost the lucrative Chatime master franchise.

Up till now, Loob Holding has managed to build a bubble tea empire on the business approach of franchising. What is franchising exactly, and how does this differ to other methods of expanding your business, say licensing or even distributorship?Franchises:

Under the Malaysian Franchise Act 1998, a franchise is an agreement whether oral or written where:

  • the rights to operate a business according to a system for a certain term is granted;
  • the rights to use a mark, trade secret, confidential information or intellectual property is granted;
  • the franchisor administers continuous control during the franchise term over the business operations; and
  • in return, the franchisee pays a fee or other form of consideration

As you can see, a system and continuous control over operations are key elements of an arrangement qualifying as a franchise. A system and continuous control may take the form of, amongst other things, a set store design and appearance, site selection, setting the sources of supply, control over staff training, and over advertising and promotion. These elements could be set out in the operation or other manuals of the franchise. In short, the franchisee adopts a set operating system and brand name.

In Malaysia, a franchise must be registered before it can be offered for sale. Certain requirements must be met in order to qualify for registration including that at least one outlet has been operated by the franchisor for at least three years. A franchise agreement must also be carefully drafted to comply with the provisions of the Franchise Act 1998. Franchisee of foreign franchisors must also register the granted franchise.

 Licenses and Distributorship

Franchises invariably involve licensing. Nonetheless, licensing in the traditional sense can be distinguished from a franchise mainly in the element of having a system present, or continuous control over business operations. Usually, the licensor will grant the rights to use a trade mark or other intellectual property, and may exercise control over how the mark or intellectual property is used, but not over the business operations of the licensee. Hence, a license merely allows the licensor to use the mark or intellectual property for the license term whereas a franchise licenses and provides a comprehensive model for operating the business.

And what of distributorship? Distributorships are generally tied to products and is where a manufacturer or supplier appoints a party to market or sell its products in a designated area.

Some considerations

If franchising can be so successful as Loob Holding has shown, then should it not be the hands-down option for business expansion?

The Malaysian Chatime story may be a franchise success fairytale (at least up till the recent termination), but one man’s meat may be another man’s poison. Franchising is one of several other methods of expansion. Other models, such as licensing may provide you more flexibility, for example, there is no need for registration, no need to have operated your own outlet for three years, and no need to have set up a comprehensive system. On the flip side, licensors do not have the extent of control over licensees that franchisors have over franchisee’s operations.

A note of caution however. Whether you choose to go the licensing or franchising route, ensure that your agreements are well drafted. Merely slapping the title “License Agreement”, “Management Agreement” or any other creative names onto an agreement containing all the elements of a franchise, will not take you outside the scope of the Franchise legislation and regulations or allow you to escape its requirements.  It remains an offence under the Franchise Act 1998 (section 6) to offer for sale an unregistered franchise. Seek the appropriate legal advice lest you fall into the trap of what is known as “the accidental franchise”.

 Conclusion:

What’s next in the Chatime saga? Fear not, says Loob Holding, we’ll roll out our own bubble tea brand. As with any expansion of brand or business venture, whether or not this will be in the form of a new franchise, a license, or some other business model, remains to be seen as the respective requirements and considerations as outlined above is considered.

 

CCLC Intellectual Property advises clients in licensing, franchising, distributorship and other commercial arrangements, and assists clients in all related matters from the drafting of commercial agreements to the registration of various intellectual property rights.