Licence or Franchise? Assessing Your Business Model in Malaysia

Business owners looking to expand sometimes offer a “brand licence” to other operators, believing this is simpler than franchising. However, the title of a contract does not necessarily determine its legal status. Before accepting payments or advertising a business opportunity, check whether the model actually meets the definition of a franchise. This helps you build a franchise network on clear foundations, rather than having to restructure after business partners have already invested.

1. Assess the actual relationship, not the contract’s title

In Malaysia, franchises are specifically regulated by the Franchise Act 1998 [Act 590], as amended. Section 4 defines a franchise by the characteristics of the relationship between the parties, rather than simply by whether the word “franchise” is used. The definition covers express or implied agreements, whether oral or written.

A document headed “licence agreement”, “business partner agreement” or “exclusive distributor agreement” therefore does not automatically fall outside the Act. The assessment must consider the rights granted, both parties’ obligations and how the business operates in practice.

Key characteristics to examine include:

• The right to operate a business according to a system determined by the owner of the business model.
• The right to use trade marks, confidential information or related intellectual property.
• The business model owner’s right to exercise ongoing control over operations in accordance with its system.
• An obligation to provide assistance in running the business.
• Payment or another form of consideration for the rights granted.
• The operator’s status as a business separate from the owner of the business model.

This checklist is a screening tool, not a legal determination. Ask a lawyer to assess the entire arrangement against the full definition in the Act, including any exclusions that may apply.

2. Map out what you provide and control

Before drafting a contract, prepare a one-page outline of the relationship. Divide it into four sections: brand rights, operating system, support and payments. In each section, describe what happens in practice, not just what is proposed in the sales presentation.

For brand rights, specify whether the business partner may use the business name on premises, packaging and social media accounts. Distinguish permission to use a trade mark from the right to operate your entire business concept.

For the operating system, list all mandatory requirements. For example, do you prescribe the shop layout, product preparation methods, sales software, staff uniforms or customer service procedures? Also note whether you have the right to carry out inspections and require corrective action.

For support, record the initial training, launch assistance, marketing guidance and ongoing advice provided. For payments, include all forms of consideration, not just fees labelled as royalties. System access charges or package payments should also be explained to your legal adviser.

A limited intellectual property licence differs from providing a complete business system. However, no single characteristic should be treated as conclusive. Quality controls on brand use, for instance, need to be assessed in the context of the overall relationship.

3. Test the model against real operational examples

Imagine a drinks business allowing an independent operator to use its name. The operator must buy a start-up package, follow set recipes, install a specified sales system and undergo regular inspections. The brand owner also provides training and operational assistance.

Even if the contract is called a licence, this combination of characteristics warrants a thorough assessment against the definition of a franchise. Renaming a “franchise fee” as a “joining charge” does not, by itself, change the nature of the relationship.

Conversely, limited permission to use a design on a product does not necessarily create a franchise. The question is whether the overall arrangement meets the legal definition, not merely whether a trade mark or payment is involved.

Use examples from your own business during the review. Bring draft contracts, promotional materials, fee schedules, operating instructions and messages sent to prospective business partners. Oral promises about training or control are also relevant to understanding the actual relationship.

Do not remove essential support from the contract simply to try to avoid the franchise label while continuing to provide that support in practice. Choose a structure that genuinely reflects how you intend the business to grow.

4. Establish the legal position before making an offer

If your model is a franchise, Section 6 of the Franchise Act 1998 requires the franchisor to register the franchise with the Registrar of Franchises before operating a franchise business or offering it for sale. Company registration alone is no substitute for franchise registration.

The agreement must also meet the Act’s mandatory requirements, including the prescribed content under Section 18. Disclosure obligations also apply: the relevant documents must be provided to the prospective franchisee at least 10 days before the agreement is signed. Franchisee registration obligations should also be checked according to the type of relationship involved.

If the assessment finds that the arrangement is genuinely a licence rather than a franchise, do not assume it is unregulated. General legislation that may be relevant includes the Contracts Act 1950 and the Trademarks Act 2019, depending on the rights and transactions involved.

Keep a record of the review’s conclusions, together with the reasons and the agreed limits of the model. Reassess the arrangement whenever you introduce additional operational controls, compulsory training or a new fee structure, as these changes may affect the original assessment.

Practical action: First, map out the rights, controls, support and payments. Obtain confirmation of the legal structure before offering the opportunity to others; a contract’s title is no substitute for compliance.