Franchise it or License it?

A Plate of Nasi Lemak

This is how nasi lemak looks like. Picture from Wikimedia.

Makcik Nasi Lemak’s Surprising Morning

One morning, Makcik Nasi Lemak is visited at her nasi lemak stall by one of her regular customers.

The customer is a successful businesswoman (according to Makcik). On that day, she came to the stall with Teh O Ais (iced tea) and a bright smile for Makcik. While choosing her lauk for her nasi lemak, the lady asked Makcik about helping to expand Makcik’s business. The lady asked if she can license Makcik’s brand.

Makcik is now in dilemma.

In business, especially food and beverage business, a company may choose to license their brand or open a franchise. An example of a prominent franchise chain is McDonalds.

Licensing, Briefly.

A license is a contract for a person or a company to grant another party permission to use its brand(s) or trademark(s). A licensee has the right to use the Intellectual Property of the business such as the brand or the trademark, the manufacturing techniques, designs, et cetera subject to the provisions of the licensing contract. A Licensor usually has less control over the day-to-day operations of the Licensee’s business. It is the Licensee who has more control on the day-to-day business operations. In addition, the licence can only be used in specific geographical areas provided in the licensing agreement. A Licensee must pay a royalty to the Licensor for using the brand(s) or trademark(s).

For example, Makcik may grant a License to another party to sell nasi lemak using her famous Nasi Lemak brand at Jalan Ampang, Kuala Lumpur. The licence may stipulate that the licensee can only sell Nasi Lemak at Jalan Ampang (a place in Kuala Lumpur), and not at other places

Franchising, Briefly.

Another option for Makcik to expand her business is through Franchising. Franchising is different from licensing. It is a contract between Franchisor and Franchisee to use franchisor’s business including brands and company strategies etc. In Noraimi bte Alias v Rangkaian Hotel Seri Malaysia [2009] 9 MLJ 475, the judge stated that the term “Franchise” refers to the ‘privilege or exceptional right, granted to person, corporation, etc; right to market company’s goods or services in particular area (see Reader’s Digest Great Encyclopaedic Dictionary, Oxford University Press 1976).”

A Franchisor normally gives training and support for the franchisee. This is a big difference from licensing, in which the Licensor does not usually give training and support. Apart from that, the Franchisor will receive a percentage of the franchise’s earnings from the Franchisee, as agreed in the franchising agreement.

Similar to licensing arrangements, a Franchisee has to pay royalty to the Franchisor.

In Malaysia, we have the Franchise Act 1998, the Licensing of Hawkers and Stalls (Federal Terrirtories) (Amendments) By­-Laws 1992, and the Licensing of Food Establishments (FT) (Amendments) By­-Laws 2002. In Makcik Nasi Lemak’s case, the relevant laws applicable are the first two laws mentioned above.

There are also other legal requirements for the setting up of a franchise under the Franchise Act 1998, which we will explore in a future piece.

A Way Forward

The best option for a first timer like Makcik is to license her brand. The initial cost for her is less compared to her setting up a franchise. It is a reasonable first step for Makcik to expand her business as she learns how to deal with licensees. Franchises also have strict legal requirements that must be complied with.

Even though franchising can promise Makcik Nasi Lemak higher returns, I believe that if she starts with a licensing arrangement (for now), she will able to open a franchise in the future. Remember the Malay saying, “Sedikit-sedikit, lama-lama jadi bukit”. (Little by little, a hill is formed.)

Author

This piece was written by Nurul Atiqah Badrul Hisham, a pupil in chambers at Koo Chin Nam & Co. and edited by Kevin Koo, a partner at Koo Chin Nam & Co.

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