Licensing vs Franchising 101

Licensing in Malaysia

Licensing is a way for two parties, namely the licensor and licensee, to come to a mutual agreement under contract law. It's an alternative approach to franchising. In licensing, the licensor grants the licensee the right to use their intellectual property, goods, or services in exchange for a fee. Unlike franchising, there's no specific law for licensing. The terms of the license agreement, agreed upon by both parties, determine the rules. This agreement outlines the rights and duties of the licensor and licensee, along with the licensing fee details.

In a licensing setup, the licensee has less control over daily business operations compared to a franchise. Typically, the licensor doesn't get heavily involved in running the business. Malaysia offers various license types, such as Exclusive, Non-Exclusive, Co-Exclusive, and Sole Licenses.

Franchising in Malaysia

Franchising is tightly regulated by the Franchise Act 1998, amended by the Franchise (Amendment) Act 2012. This act covers several aspects of franchising, including franchise registration, essential clauses in franchise agreements, franchise operations, and extension of franchise terms.

Under the Franchise Act, a "franchise" refers to an arrangement between two or more parties. It includes:

a) Granting the franchisee the right to operate a business using the franchisor's system for a determined time.

b) Allowing the franchisee to use the franchisor's trademark, trade secret, or intellectual property.

c) Letting the franchisor maintain some control over the franchisee's business operations.

d) The franchisee might need to pay a fee for these rights.

Differences between Licensing and Franchising

Registration: Franchising requires registering with the Registrar of Franchises, while licensing usually doesn't need formal registration.

Control: Franchising gives the franchisor more control over how the business is run compared to licensing.

Trademark: Franchising demands trademark registration; licensing doesn't mandate it but is often recommended.

Term: Franchises must last at least five years, but license terms can be more flexible.

Similar Businesses: Franchising may prevent the franchisee from engaging in similar businesses during the term, whereas licensing doesn't usually impose such restrictions.

Renewal and Termination: Franchising has stricter rules for renewals and terminations compared to licensing.

Conclusion

License agreements and franchise agreements both involve sharing business assets and intellectual property. However, license agreements offer less control to the licensee than franchise agreements do. It's important to be careful with license agreements so they don't unintentionally cross over into franchise territory and cause legal issues.

This article has been produced for general information purposes and further advice should be sought from a professional advisor.