Every business interested in becoming a franchisor is confronted by two sets of requirements:
- The requirements of the law
- The requirements of franchising itself
The Franchise Act 1998 (Act 590) only requires that a franchisor have two documents: a Franchise Agreement and Disclosure Document. These documents must be presented to a prospective buyer before a franchise can be sold. The act requires that the franchisor register these documents with the Registrar of Franchise (RoF), which is under the purview of the Ministry of Domestic Trade, Co-operative & Consumerism (MDTCC).
But beyond these two documents and their registration, a company serious about franchising needs several other elements in place. Before a franchise agreement is drafted, business decisions must be made that are crucial to the success of the franchise. Strategic Planning covers all the decisions on the form and structure of the franchise corporation in both the short and long term from point at which the franchise program is initiated to the time period when the company reaches maturity. Decisions must be made on matters such as the type(s) of franchise to offer, territory size, training programs, franchise fee, royalty and advertising fee. These decisions should be made before legal documents are drafted and are not to be taken lightly as they will impact the health and vitality of the franchise. They should be based upon the nature of the business, market, competition and long-term goals of the franchise.
Other considerations include operations, marketing and sales. An Operations Manual should be provided to all franchisees, detailing how the business functions. A good operations manual is an extension of the legal documents, protecting the franchisor against liability. It also builds credibility in the franchise organization and works as a sales tool to assure prospective franchisees that a solid, documented system is in place to support them.
In order to find and attract prospective franchisees, a Marketing Program must be devised. A budget must be established, media chosen, ads produced, as well as a franchise sales brochure and possibly a franchise sales video. Franchisees have a lot of choices and a good sales strategy will make use of the ad budget efficiently, giving compelling reasons for the prospective buyer to buy your franchise.
Finally, franchise sales personnel must be trained in both the practical aspects of selling franchises and in evaluating important legal requirements.
Generally speaking, the time frame from the decision to franchise to the beginning of the franchise sales program is approximately six months to one year.
Caution: Some companies are franchising without realizing it! Often enough, companies end up creating an illegal franchise without intending to do so. No matter what name it is given (licensing, for example) a company is franchising if the following conditions exist:
- Another individual or business has been allowed to distribute products or services under the company's name using its marketing plan or system of operations.
- A fee has been paid for this privilege.
Companies in this situation should seek professional advice immediately. Violations of franchise laws can result in fines of up to RM50,000 for the first offence and additional fines of RM10,000 or jail term of up to 5 years or both for the second offence.
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