FRANCHISING BUSINESS

CHAPTER 8
 OBJECTIVES

 Understanding the definition of Franchising

concept and Franchise Act 1998.
 History and evolvement of Franchise in US &
Malaysia
 Understanding of basic concept of Franchise
 Types of Franchise
 Advantages and disadvantages of Franchise
 Introduction

The word franchise originated from French word –

franco means Freedom.
Franchise is used as a strategy to penetrate local
& international markets. Eg. McDonald’s, KFC,
Burger King & 7-Eleven after taking control of
local market (USA), Americans franchaisors
spread their businesses to global markets.
Franchise History
• Franchise business started in Europe 100 years.
• Franchise biz. expanded rapidly in the USA
especially in fast-food industry in 1950s.
• 1955 – Ray Kroc started franchising ‘McDonald’s’
by giving his idea to McDonald brothers, Richard
& Maurice McDonald in California.
• 1955 – Harland Saunders started KFC in
Kentucky.
 Franchise History
 Ray Kroc markets McDonald’s by emphasizing
the aspects of Quality, Service, Cleanliness &
Value (Q,S,C & V).
 1961 – Kroc established Hamburger University in
Illinois as a learning & training centre for food
franchisee & restaurant managers. (5,000 per
year intake in 2005).
 1985 – there are 250,000 American franchise
outlets throughout the world (foods, automotives,
hotels etc.) 17% growth annually. In Japan, sales
through franchise US$150 billion, 7% growth.
Franchise in Malaysia
 Franchise biz in Malaysia started in 1940s
through companies like Bata, Singer, Shell & BP.
 In 1970s & 1980s witnessed a rapid growth in
franchising biz when A&W, KFC & McDonald’s
spread to Malaysian soil.
 1990s franchise system of doing business got the
attention of the government & Malaysians.
 1992 – Government established “Franchise
Development Programme”.
Franchise in Malaysia
 Three parties/bodies that actively promote
franchise business in Malaysia;
1) Franchise & Vendor Unit at the Ministry of
Entrepreneurship & Cooperatives Development.
2) Perbadanan Nasional Berhad (PNS). (MoF)
3) Malaysia Franchise Association (MFA).
Together, they conduct training, courses, seminar,
exhibitions to expose & encourage
entrepreneurs to enter into franchise
businesses.
Franchise in Malaysia

 1998 – the government introduced Franchise Act

to monitor & supervise franchise business
activities in Malaysia.
 Section 6 of the Franchise Act 1998 requires that
every franchaisor should be registered with the
Registrar of Franchise (RoF).
Franchise in Malaysia

 Asat May 2006, there are 268 franchisors

registered with the RoF. (103 foreign & 165
local). Industry Category,
29.1% food & beverage,

16.0% apparel & accessories,

12.7% services & maintenance.

 FRANCHISE CONCEPT

A form of business that involves the

distribution & marketing of products or
services through a main company called
Franchisor (owner who gives franchise
right) and Franchisee (a person who
receives franchise right).
 The right given; the use of name & brand
based on a pre-set system, predetermined
location within a specified period.
Franchise Definition

 ‘Franchise is a form of business where a

franchisor gives permission & right
(brand, logo, patent, trademark, formulae,
recipe, techniques, standard operation
procedure -SOP) to be used by a
franchisee to operate a business in return
for a franchise fee & royalty’.
 FRANCHISE DEFINITION
SECTION 4 FRANCHISE ACT 1998
 Franchisor (franchise owner) gives the
right to the franchisee (franchise holder)
to conduct & manage a business;
 Franchisor gives the right for the
franchisee to use intellectual asset;
 Franchisor has the right to perform a
continuous monitoring and inspection;
Cont…

 Franchisor is responsible in assisting the

franshisee;
 Franchisee must pay the franchising fee,
royalties and other fees; and
 Franchisor and franchisee are two
separate entities and are NOT a
partnership business.
 Process of selling a franchise
A franchisor can expand his business faster
through franchising system.
 A franchisor who wants to sell his franchise
has to;
 Be a registered franchisor (Sec. 6, FA1998)
unless he has exemption under sec. 58 of
FA1998.
 Foreign franchisor must at least open his
‘prototype outlet’ for a minimum of 3 years.
 Process of selling a franchise
A franchisor can expand his biz through appointing
‘master franchisee’ who in turn will appoint his
‘sub-franchisees’. A master franchisee also has an
option to open his own branches of outlets.
 A sub-franchisee, also known as unit franchisee is
not permitted to appoint another sub-franchisee,
however he is encourage to open more than one
outlet of his own if the demand is high.
Process of selling a franchise

 Eg;how Kenny Rogers International

expand its biz in Malaysia. KRI appoints
Berjaya Roaster Sdn Bhd (BRSB) as its
master franchisee. BRSB opens 20
outlets of their own. BRSB also appoints
10 sub-franchisees operating in KL,
Selangor, Sabah & Sarawak.
 TYPES OF FRANCHISE
 1) BUSINESS FORMAT FANCHISE
 Franchisee is given the right to duplicate the entire
business system (operation, training, accounting,
tradename, logo, promotion etc.) used by the
franchisor.
 This is the most popular type on franchising that is
being acknowledged & supported by the
government’s Franchise Development Program.
 Eg. McDonald’s, KFC, PizzaHuts, Marrybrown.
 TYPES OF FRANCHISE
 2) BRAND NAME or TRADE MARK FRANCHISE
 Franchisor gave the right to use the name, brand,
trade mark & logo that enables the franchisee to
produce a product in a certain region.
 Franchisee does not need a complete system &
business concept as of business format
franchising.
 Eg; Company A uses cartoon character Doremon
or Walt-Disney to produce children’s clothing.
 TYPES OF FRANCHISE
 3) FRANCHISE BY CONVERSION
 An existing company of a particular industry being
invited to be a part of the Franchisor’s chain of
network.
 The appointed Franchisee will change the brand
name or trade mark to that of the Franchisor’s.
 Eg. Syarikat Madani Greatlink Sdn. Bhd. is a
private car distributor in Banting, Selangor that
was given the right to distribute Proton cars by
Proton Edar to the public.
See you again next week

To Muslims; happy fasting.

Selamat Berpuasa.
 RESPONSIBILITIES OF
FRANCHISOR & FRANCHISEE
 FRANCHISE BIZ WILL RUN SMOOTHLY IF BOTH
FRANCHISOR & FRANCHISEE KNOW THEIR
OWN JOBS & RESPONSIBILITIES WELL.
 IF ANY PARTY IGNORE THEIR
RESPONSIBILITIES, THE RELATIONSHIP WILL
BE STRAINED & TURN SOUR (BAD).
 IF PROBLEM IN RELATIONSHIP CONTINUES,
SOONER OR LATER THE RELATIONSHIP WILL
END. FRANCHISE CONTRACT WILL BE
TERMINATED.
 RESPONSIBILITIES OF FRANCHISOR &
FRANCHISEE

 BOTH SIDES WILL SUFFER LOSSES.

FRANCHISOR WILL LOSE HIS REPUTATION &
FRANCHISEE WILL LOSE HIS INVESTMENT.
 SO, BOTH PARTIES MUST CARRY OUT THEIR
RESPONSIBILITIES TO AVOID PROBLEMS.
 SECTION 30 OF FRANCHISE ACT 1998
EXPLAINS CLEARLY THE RESPONSIBILITIES
OF FRANCHISOR & FRANCHISEE.
RESPONSIBILITIES OF FRANCHISOR

 SINCE FRANCHISOR SELLS HIS BIZ SYSTEM

TO OTHERS, HE BEARS BIGGER
RESPONSIBILITIES.
 FIRSTLY, HE HAS TO PREPARE A COMPLETE

WRITTEN ‘FRANCHISE PACKAGE’ SO

THAT IT CAN BE APPLIED & PUT INTO
OPERATION BY HIS FRANCHISEE WITHOUT
PROBLEMS.
RESPONSIBILITIES OF FRANCHISOR

 ‘FRANCHISE PACKAGE’ IS DIVIDED

INTO 2 PARTS;
 1) PROMOTION PACKAGE
 2) OPERATION PACKAGE
 1) PROMOTION PACKAGE
 PROMOTION PACKAGE IS PREPARED BY A
FRANCHISOR TO PROMOTE HIS BIZ SYSTEM
TO POTENTIAL FRANCHISEE.
 IT HELPS POTENTIAL FRANCHISEE
UNDERSTAND THE SYSTEM BETTER. IT
EXPLAINS THE JOBS & RESPONSIBILITIES OF
BOTH PARTIES & REQUIREMENTS TO MAKE
THE BIZ A SUCCESS.
1) PROMOTION PACKAGE
 PROMOTION PACKAGE CONTAINS 2
IMPORTANT DOCUMENTS;
 a) DISCLOSURE DOCUMENT
 b) FRANCHISE AGREEMENT
 a) DISCLOSURE DOCUMENT
 Section 4,FA1998 explains in details some
important information franchisor should include in
Disclosure Document.
(Background; Management team & Staff; Court
action & proceeding against franchisor;
Bankruptcy; Franchise fee & other fees; Financial
obligation franchisee has to fulfilled; Initial
investment by franchisee; Obligation on
franchisee to buy/rent materials & equipments
from a particular parties; ……
 a) DISCLOSURE DOCUMENT

 …. Obligation on franchisee to buy/rent materials

& equipments according to standard &
specifications; Financial facilities; responsibilities
of franchisor before & during operation of biz;
Exclusive territorial right; Trademark & Intellectual
Properties; Patent & Design; Requirement to
concentrate on biz; Forbiddance on selling other
products; Renewal, termination, buyback,
modification of agreement; ……..
a) DISCLOSURE DOCUMENT

 …. Other information about franchisor’s biz;

franchisor’s financial statements; any awards &
recognitions won by franchisor; certification by
franchisor to offer his franchise system to
franchisee)
b) FRANCHISE AGREEMENT

 ANOTHER FRANCHISOR’S IMPORTANT

RESPONSIBILITY IS TO PREPARE A
FRANCHISE AGREEMENT (FRANCHISOR
BEARS THIS COST).
 SECTION 18 (5). COST OF PREPARATION
OF THE AGREEMENT CAN BE TAKEN
PARTLY FROM A FRANCHISEE IF A
FRANCHISEE TERMINATE THE CONTRACT
DURING THE “COOLING OFF PERIOD”
 b) FRANCHISE AGREEMENT
 SO IMPORTANT IS THE “FRANCHISE
AGREEMENT”, FA 1998 PROVIDES ELEVEN
SECTIONS UNDER PART III TO EXPLAIN SOME
OF THE MAIN POINTS IN THE AGREEMENT.
 SEC 18–REQUIREMENTS OF FRANCHISE
AGREEMENT; S.19–PAYMENT OF FRANCHISE
FEE; S.20 – PROHIBITION AGAINST
DISCRIMINATION; S.21–PAYMENT OF
ROYALTY; S.22 –PROMOTION FUND; S.23 –
PROMOTION FEE …….
b) FRANCHISE AGREEMENT
 ….SEC24- REGISTRATION OF TRADEMARK
& SERVICE MARK; S.25 – DURATION OF
FRANCHISE; S. 26 – CONFIDENTIALITY OF
INFORMATION; S.27 – PROHIBITION ON
SIMILAR BUSINESS; S.28 – WAIVERS VOID
(ANY STIPULATION IN FRANCHISE
AGREEMENT PURPORTING TO BIND A
FRANCHISEE TO WAIVE COMPLIANCE WITH
ANY PROVISION OF FA1998 IS VOID).
b) FRANCHISE AGREEMENT

 INFORMATION & PARTICULARS CONTAINED

IN “FRANCHISE AGREEMENT” WILL
OVERRIDE THOSE IN “DISCLOSURE
DOCUMENT” SHOULD THERE BE ANY
CONFLICT OR DISCREPENCY BETWEEN THE
TWO (DISCLOSURE DOCUMENT &
FRANCHISE AGREEMENT).
 2) OPERATION PACKAGE
 SECOND PART OF FRANCHISE PACKAGE IS
OPERATION PACKAGE (1ST IS PROMOTION
PACKAGE). IT COMES IN THE FORM OF
MANUALS (BOOKLETS OF WRITTEN
INSTRUCTIONS).
 INSTRUCTIONS IN MANUALS ARE WRITTEN IN
DETAIL, CLEAR & PRECISE MANNER SO THAT
EVEN INEXPERIENCED FRANCHISEE CAN
REFER, ADAPT & OPERATE THE SYSTEM
WITHOUT PROBLEMS OR MISTAKES.
10 MANUALS

 “OPERATION,
TRAINING, MARKETING,
ADVERTISING, FIELD SUPPORT, QUALITY
CONTROL, PRE-OPENING, LOCATION
CHECK, REPORTING, AND CRITERIA TO
SELECT A LOCATION”.
 RESPONSIBILITIES OF FRANCHISEE

 FULLCOMITMENT TO THE OPERATION &

MANAGEMENT OF THE BUSINESS
 COMPLIANCE OF BUSINESS METHOD/SYSTEM
 RECRUITMENT & TRAINING OF STAFF
 PAYMENT OF FEES, ROYALTIES & SALARIES
 PROTECT THE BUSINESS GOOD NAME
 GOOD CONDUCT
 RESPONSIBILITIES OF FRANCHISEE
 ALSO VERY IMPORTANT FOR A FRANCHISEE
TO MAINTAIN A GOOD WORKING
RELATIONSHIP WITH HIS/HER FRANCHISOR.
 GOOD & CLOSE RELATIONSHIP REDUCES
POTENTIAL CONFLICTS BETWEEN
FRANCHISEE & FRANCHISOR.
 IN MALAYSIA, MOST CONFLICTS OR
DISAGREEMENTS BETWEEN THE TWO ARE
SOLVED THROUGH ARBITRATION.
 ADVANTAGES OF FRANCHISE
BUSINESS TO THE FRANCHISOR

 1) Growth cost is lower – Franchisor can grow &

expand his business at a lower cost. Franchisor
does not need to spend money on renting
premises, searching for good locations, paying
staff salaries, buying fixed assets etc. (cost are
borne by franchisee). So growing & expanding
business through other people.
 ADVANTAGES OF FRANCHISE
BUSINESS TO THE FRANCHISOR
 2) Lower Number of Workforce/Staff. – A
franchisor does not have to hire large number of
staff. Every franchisee will hire their own staff.
Franchisees are responsible to manage, control &
pay their own staff.
 3) Purchasing in bulk – franchisor can get
cheaper supplies by buying in greater quantity or
amount.(he then distributes to his franchisees).
 4) Centralized advertising & promotion will
reduce operation cost.(both share the costs).
 ADVANTAGES OF FRANCHISE
BUSINESS TO THE FRANCHISEE

 1) System of Business that is proven

Successful – franchisee gets a chance to use an
established brand name & a systematic business
model. Product is easily acceptable to customers
because it is already well-known locally &
internationally. Franchisee only needs to follow the
system & maintains its good reputations.
ADVANTAGES OF FRANCHISE
BUSINESS TO THE FRANCHISEE

 2) Does not require experience – to be a

franchisee, experience is not the main criteria.
What is more important is full commitment,
confidence, ability to raise capital & ability to follow
instructions. New & inexperience franchisee will
get training & support until he can run the
business successfully by himself. Eg, McDonald’s
franchisee will have to undergo a 6 months
training before being allowed to be a franchisee.
 ADVANTAGES OF FRANCHISE
BUSINESS TO THE FRANCHISEE

 3) Standardized Quality Control – Franchisee

has a chance to market high quality products.
Franchisor emphasizes on product quality.
Franchisor ensures products’ quality by providing
continuous training, constant monitoring through
scheduled visits & inspections, and making sure
that franchisee follows strictly to the instruction in
the manuals. Eg. Fast-food industry is famous
with QSC (Quality, Service & Cleanliness).
 DISADVANTAGES OF FRANCHISE
BUSINESS TO FRANCHISOR

 Self Owned vs. Franchise Units – Owning &

operating the business yourself is better in term of
commitment to fulfill your mission & vision. If you
franchise your business, franchisee’s commitment
is based on contract period (usually 5 years),
franchisee might not want to continue his
commitment after that. If the business is self-
owned, commitment towards set strategic
objectives will continue.
 DISADVANTAGES OF FRANCHISE
BUSINESS TO FRANCHISOR
 Difficulty in selecting a good franchisee – Not
easy to get a good franchisee, most of them are
inexperience, lack of capital & unmotivated. Very
difficult to know who has the correct attitude to be
a good franchisee.
 Communication – if communication between
franchisor & franchisee is not good, the probability
of the relationship to turn sour is high. Eg. If
franchisee does not report honestly the monthly
sales, franchisor might become suspicious.
 DISADVANTAGES TO FRANCHISEE
 Capital too high – becoming a franchisee is more
expensive than starting up your own business.
Many fees: Franchise Fee, royalty, Advertising &
Promotion fees, training fees, administration &
management fees etc.
 Eg. Marrybrown; start-up capital RM450,000 &
franchise fee RM60,000 apart from advertising &
administration fees every month.
DISADVANTAGES TO FRANCHISEE

 Fail to become a profitable business. Despite

all the efforts, good system, famous brand name
etc., franchisee sometimes cannot make profit,
his sales cannot cover the expenditures.
Business will also fail if franchisor does not
deliver his duties & responsibilities.
 DISADVANTAGES TO FRANCHISEE
 Termination of Contract/Agreement. Franchisee
is exposed to contract termination even though his
duration is not yet over. Under Section 31 FA
1998, a franchisor can terminate the contract if a
franchisee fails to comply with any terms of the
agreement or if a franchisee fails to remedy the
breach committed by him or his employees. So if
the relationship between franchisee & his
franchisor is not good, a franchisor can find a lot of
reasons to end the contract.
 CONCLUSION

 Franchising is the easiest way to become an

entrepreneur (provided you have the capital).
 The government of Malaysia encourages franchise
as the “engine of growth” to the development of
the country’s economy, this provides a lot of
opportunities to the locals.