Fundamentals of Malaysian Franchising – Part 1 (by GoBear)

The Wacky D

I’ve personally regarded the whole franchise business with scorn for all the years that I was an entrepreneur.
It may have been my upbringing (my dad never believed in building a business that is not entirely in his control), or it is just me (I’ve never believed in using my resources to build a business that isn’t my own).

Today, as I passed the 6th month mark in my food business, I realised that a franchise would be a feasible choice for those who are considering to embark on running their own business. Because, really, establishing a brand from scratch has its challenges that goes beyond financial means, experience and plain guts.
I believe fate and luck play a role too, but with the proven structure of a franchise, an aspiring entrepreneur holds a higher chance of success.

And it couldn’t have been more timely that GoBear published not just one, but TWO well researched and easily digested articles about franchising.

In PART ONE (this article), the content is focused on a Franchise Consultant’s perspective

According to a global report, 70% of Malaysians have positive attitude towards entrepreneurship with 50% envision starting a business. Yet, investing on a business with limited experience can be challenging for aspiring entrepreneurs.

Franchising could be viable alternative enabling entrepreneurs to capitalize on a proven business model and expand it with less complication. The government registered 830 franchise businesses in 2016, 67% being local brands. Franchise industry is expected to contribute (RM) 35 million to the nations GDP by 2020, in line with the government’s plan to position Malaysia as a franchise hub in South East Asia.

To learn more about franchising in Malaysia, GoBear Malaysia spoke to Franchise Consultant, SestNee Lim from Biz Hubb Management. Kick-starting her career in franchising back in 2008, Lim established a local café chain with a network of more than 50 outlets in Malaysia and subsequently expanded the brand to international platform. Currently, Lim specializes in helping entrepreneurs develop a comprehensive franchise system. She is also an associate partner with Asiawide Franchise Consulting.

Question 1: What is the common misconception to Franchising in Malaysia?

LIM: Common misconception is that; franchise is only applicable to food and beverage (F&B) industry. Yet, it is also applicable to industries such as education, fashion and cosmetics. The Malaysian Domestic Trade, Co-operatives and Consumerism (MDTCC) registered eight sectors of franchise business.

** Image Source: Franchise for All, KPDNKK @ 2016

Question 2What would it cost to start and build a franchise?

LIM: The capital required to acquire a franchise business differs according to the business. It can range from RM 100,000 to RM 2,000,000. For instance, a café business with a scale of 2,500sqft can cost up to RM 800,000. However, the government has introduced “Micro Franchise Scheme” to encourage growth of entrepreneurship in Malaysia. The investment for Micro Franchise is as low as RM50, 000.00

Question 3Do you think there is adequate support for franchising in Malaysia?

LIM: Yes, the government has been actively promoting and supporting franchising in Malaysia. In terms of gaining education and certification, one can attend franchise related courses offered by Perbadanan Nasional Berhad (PNS) or Malaysian Franchise Association (MFA). Additionally, regulations’ pertaining to franchising is under the purview of MDTCC, tasked to ensure that both the franchisor and the franchisee are given fair treatment.

Question 4Where does one start? How is the loan application process?

LIM: One can identify which franchise brands are offering franchise programs through MFA. Naturally, PNS or local banks would offer loans in accordance with the government’s direction to support growth of franchising in Malaysia. The potential franchisee will have to submit relevant documents as stipulated by PNS or the banks. This often includes; personal particulars, offer letter from the franchisor, outlet survey checklist and etc. for the application. Most applications take approximately one (1) month for processing.

Note: MDTCC introduced the Franchise Financing Scheme (FFS) in collaboration with Credit Guarantee Corporation (CGC) to help viable franchise business secure necessary financing through loans granted by partner financial institutions. The amount approved is subject to the business need with the maximum loan amount being RM 7.5 million. The partner banks are CIMB Bank Berhad and Maybank Berhad.

Question 5What does a Franchise agreement entail?

LIM: All details involving franchise agreements are governed under Franchise Act 1998. Typically, potential franchisee should take note that:

  • Franchise term should not be less than five years
  • The fee structure should be clearly indicated i.e. franchise fee, royalty fee, training fee, and setup costs.
  • Franchisee and employees under franchisee’s purview must not disclose any confidential information throughout the franchise term and subsequent two years thereafter
  • Franchisee and employees under franchisee’s purview must not carry out businesses that are similar to that of the franchisor throughout the franchise term and for two years thereafter.

Question 6What are the advantages and disadvantages of owning a franchise?

LIM: Franchisee “manages” an established brand with widespread recognition and proven track record. Plus, franchisors provide relevant training and support to manage and maintain consistent level of quality. This includes support for operational management such as site selection, design, construction, financing, advertising and etc.

Common misconception is that owning a franchise business equals to “being your own boss”. This is inaccurate as a franchisee has no right to modify or change the business model and brand, especially if the business model has been proven successful. Nonetheless, a franchisee may propose ideas for improving the business, likely implemented if there is added value to the business.

Another misconception is that investing in a franchise will have guaranteed returns. Franchisors do not guarantee success and return of the investment (ROI). Moreover, upfront investment to franchise the business can be substantial as mentioned earlier.

Question 7What kind of support does a franchisee receive?

LIM: Usually, franchisors will support and guide franchisees throughout the franchising term. Franchisors should be able to assist in solving any problem encountered pertaining to the business needs based on their vast experience running the business.

If a franchisee feels that the franchisor is not being supportive enough, the franchisee may file a complaint with MDTCC under the “Franchise Division” and MDTCC shall investigate further.

Question 8What are the usual legal issues that one should be mindful off in franchising?

LIM: Before considering a franchise business, check with MDTCC and verify that the brand is registered as franchisor. If the brand or business is not registered under MDTCC then it is NOT a franchise brand.

Review the clauses in the franchise agreement, particularly involving early termination, training and support and ingredient supply (for food franchises). It’s best to engage a lawyer to oversee the legal aspects, especially in scenarios pertaining to contract breach or violation.

Do not confuse the term “licensing” and “franchising”. Franchising is a method of scaling a proven business. In this case, the franchisor maintains certain level of control over operations and processes used by the franchise, to safeguard the business model. In exchange, the franchisee seeds the capital for the business, helps to promote the brand and pays a fee.

Conversely, licensing is the proprietor retaining ownership of the intellectual property associated with the product/business while granting others rights to use it. The licenses can be sold to multiple companies and the licensor does not have any control in the business operations of the licensee.

Question 9Are there any royalties or marketing fees involved when buying a franchise?

LIM: Yes, there will be royalty and marketing fee. It should be stated as “Advertisement and Promotional Fees” (A&P) in the franchise agreement. The charges may vary according to the type of business or company. For example, Station One Leisure Café charges a royalty fee of 5% and an A&P of 2% per month, respectively.

Question 10How would you describe a typical franchise contractual relationship in Malaysia?

LIM: Franchisor provides expertise, knowledge and support while franchisee provides money, time and workforce. It should be a balanced relationship as both parties are equally important for the franchise’s success. A franchisee must be trustworthy and be able to work well with franchisor.

Question 11How long it does usually takes before a franchise generates profit?

LIM: Usually, it would take 18 to 24 months to generate ROI but obviously this differs according to type of franchising business. Aspiring franchisees and entrepreneurs should reconsider on the franchise’s business potential if it’s taking more than 24 months to generate a return or to break even.

Question 12Are there any exit strategy should the franchise fail?

LIM: Usually, if a franchisee intends to exit from the franchise business, he or she may consider the following options:

  • Relocating the franchise location
  • Selling the business to another franchisee
  • Close down the business

Its best to discuss an exit strategy before entering a business deal with a franchisor. Ideally, franchisee should never give an impression of being pessimistic about the business and should merely discuss the legal and logistical aspects of transferring the business.

Question 13What is your advice to an aspiring franchisee or entrepreneur in Malaysia?

LIM: Have a clear understanding on how franchising works. Do your research and equip yourself with adequate knowledge before investing on a franchise. This will help you negotiate and secure a mutually beneficial deal. MFA and PNS offer many courses and trainings on such topics, so make use of the opportunity.

So, you’ve identified a franchise business to invest in?
Here are a couple of questions to figure out before moving forward:

  • What is the total investment required for getting into the franchise?
  • Where can I get financial support?
  • How much can you earn as a franchisee?
  • How long will it take to break even?
  • Is your research detailed? (Have you researched the industry, the franchisor, the disclosure documents, and past/current franchisees?)

While the questions may be simple and straightforward, the goal is to ensure that potential franchisees/entrepreneurs are well prepared before venturing into a business deal.

In the business world, you need to make sound decisions and that starts from understanding your personal attributes. Analyze your own strength and limitation before committing to a franchise business (or any business venture).

** Watch out for Part 2 – Fundamentals of Malaysian Franchising: An Entrepreneur’s Perspective

To compare the most suitable credit cards or personal loans for you, visit GoBear Malaysia’s comparison site today.





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