Franchising vs Licensing

In a world where social media is a powerful digital marketing tool, to stand out and establish a strong brand presence is important. Franchising and licensing are two business models utilising commercial contracts that allow the sharing of specific brand elements in return for a monetary consideration. These strategies give entrepreneurs a significant advantage, enabling them to leverage on well-established brand to reach a wider audience and expand their business more rapidly than starting from scratch.

There is a fine line differentiating franchising and licensing, as both involve granting rights to use a brand’s intellectual property. However, while franchising typically requires the franchisee to operate under the franchisor’s established business system and adhere to strict guidelines, licensing offers more flexibility, allowing the licensee to use specific elements of the brand without being bound by the same level of operational control. Understanding these distinctions is crucial for entrepreneurs in choosing the right model for their business expansion.

Aspect	Franchising	Licensing
Definition	A business model where the franchisor grants the franchisee the right to operate a business under the franchisor’s system and brand.	A business arrangement where the licensor grants the licensee the right to use its intellectual property rights.
Parties	Franchisor: Grants the rights to operate the business. Franchisee: Operates the business under the franchisor’s system.	Licensor: Grants the rights to use intellectual property. Licensee: Uses the intellectual property under the agreed terms.
Governing Law	Governed by the Franchise Act 1998 (“Act”) and requires adherence to its provisions.	Governed by the terms and conditions of the license agreement; not governed by any specific legislation.
Type	1. Single Unit Franchise The franchisee is granted the right to operate a single franchise unit. The franchisee invests their own capital and typically manages the business hands-on. 2. Multi-Unit Franchise The franchisee is granted the right to operate multiple franchise units and agrees to open a specific number of franchises within a set of time frame and must have the financial and managerial capability to manage multiple franchises. 3. Area Development Franchise Similar to the Multi-Unit Franchise, but the franchisee (area developer) is granted rights to develop multiple franchises within a defined geographical area. The area developer commits to opening a set number of franchises within a specific period. 4. Master Franchise The franchisee (master franchisee) is granted the rights for a specific country, region, or continent. The master franchisee can open and operate units and has the right (and sometimes the obligation) to recruit and manage sub- franchisees within the designated area, effectively acting as a franchisor.	1. Exclusive Licence Only the named licensee can use the intellectual property rights, excluding even the licensor from using them. 2. Non-Exclusive Licence Both the licensor and the named licensee can use the intellectual property rights, and the licensor can also grant the same rights to other licensees. 3. Co-Exclusive Licence Multiple licensees can be granted the rights, but the licensor limits the number of licensees, combining elements of both Exclusive and Non-Exclusive Licences. 4. Sole Licence Only the licensor and the named licensee can use the intellectual property rights, with no rights to grant sublicences or licence to others.
Control	Under Section 18 of the Act, the franchisor maintains continuous and strict control over the franchisee’s business operations.	The licensee generally has significant operational flexibility; the licensor has limited control over operations.
Business Registration	Mandatory to register the franchise business before starting operations, as per Section 6 of the Act.	No requirement to register the business before commencing operations under a license agreement.
Intellectual Property	The franchisee is granted the right to use the franchisor’s entire business system, including trademarks and branding. Under Section 24 of the Act, a franchisor is required to register his trade mark relevant to his franchise.	The licensee is granted the right to use specific intellectual property such as trademarks, patents, or copyrights.
Term	Shall not be less than five (5) years as required under Section 25 of the Act	Flexible and can be set by the licensor according to the agreement.
Termination	Under Section 31 of the Act, no franchisor or franchisee shall terminate a franchise agreement before the expiration date except for good cause, where either party:- fails to comply with the terms of the franchise agreement or any other relevant agreement between them; fails to remedy a breach within the period stated in a written notice, which must be at least 14 days; makes an assignment of the franchise rights for the benefit of creditors or a similar disposition of the assets of the franchise to any other person; becomes bankrupt or insolvent; voluntarily abandons the franchised business; is convicted of a criminal offence which substantially impairs the goodwill associated with the franchisor’s mark or other intellectual property; or repeatedly fails to comply with the terms of the franchise agreement. .	The licensor has more flexibility to choose whether to renew or terminate the license without cause.
Restraint of Trade	Section 27 of the Act restrains the franchisee and its related parties from engaging in similar businesses during the franchise term and for two (2) years after the franchise term.	Restraint of trade clauses in the agreement are considered void under Section 28 of the Contracts Act 1950.
Payment	Includes a franchise fee and ongoing royalties, with strict conditions on payment.	May include licensing fees and royalties, but terms are more flexible and negotiable.
Benefits	1. Brand Recognition Franchisees benefit from the established brand and reputation of the franchisor. 2. Support & Training Franchisors typically provide extensive support, including training, marketing, and operational guidance. 3. Proven Business Model Franchisees operate under a tested and successful business system. 4. Exclusive Territory Franchisees often get the right to operate in a specific geograp	1. Flexibility Licensees have more freedom in how they operate their business compared to franchisees. 2. Lower Initial Cost Licensing arrangements may require lower upfront fees and fewer ongoing payments. 3. Simpler Agreements Licensing agreements are typically less complex and offer more straightforward terms than franchise agreements. 4. No Territorial Restrictions Licensees often have the ability to operate in multiple areas without the restrictions that may come with a franchise.
Disadvantages	1. High Costs Initial franchise fees and ongoing royalty payments can be substantial. 2. Limited Control Franchisees must adhere to the franchisor’s strict rules and guidelines, limiting their autonomy. 3. Ongoing Obligations Franchisees are often required to participate in mandatory training, marketing campaigns, and regular updates from the franchisor.	1. Less Support Licensees typically receive less support from the licensor compared to franchisees. 2. Weaker Brand Association Licensing may not provide the same level of brand recognition and trust as franchising. 3. Less Control Over Quality Licensors have less control over how their intellectual property is used, which can affect the brand’s reputation. 4. Potential for Competition The licensor can grant the same rights to other licensees, leading to more competition.
Example of Business	Food and Beverages: Tealive Q Bistro Rotiboy Retail: Senheng 7 Eleven Education:, Krista Kindergarten Little Calliphs	The Walt Disney Company: Disney granting the third party the right to use Disney`s intellectual property for specified products, services, or promotions Netflix: Netflix acquire content rights from studios, production companies, and independent creators to stream their movies, TV shows, and documentaries on the Netflix platform. Winner’s Fried Chicken: Licensees of Winner’s Fried Chicken are given the freedom to customize their operations. They can choose their own methods for frying the chicken, use different marinades, source their own ingredients, sell additional food items, and set their own prices and there are no specific performance targets or KPIs required for these licensees.

In conclusion, both franchising and licensing offer distinct advantages and challenges for entrepreneurs looking to expand their business through established brands. By understanding the differences and weighing the pros and cons of each model, entrepreneurs can make an informed decision that aligns with their business goals and operational style, ultimately driving successful growth and brand recognition.

For entrepreneurs looking to expand your business through franchising, licensing, or seeking expert legal advices please reach out to our Managing Partner, Mr. Nazmi Mohd Zaini (nazmi@nzchambers.com) or Advisory & Compliance Partner, Mr. Fakhrul Fadzilah (fakhrul@nzchambers.com) or Associate, Ms. Husna Shariff.

Authors:

Nazmi Mohd Zaini
Fakhrul Fadzilah
Husna Shariff