If you’re wondering if you should invest in a franchise business in Malaysia, you’ve come to the right place.
Franchising is seen as a time-saving alternative to setting up a brand and business from scratch. By partnering with a franchisor, you’ll not only be able to sell products and services under their brand, you’ll also gain access to proprietary business information and support that will enable you to manage and run the business on a day-to-day basis.
Some of the most famous brands that operate under a franchise system in Malaysia include Mixue, McDonald’s, and Starbucks. In fact, franchising has existed in Malaysia since Singer & Bata entered our country in the 1940s.
At the outset, buying a franchise can save you the time and headache of creating and establishing your own brand and business from the ground up. While this approach has many advantages, it also has unique downsides you’ll want to consider before investing.
If you want to learn more about franchising and whether it is the right business for you, continue reading!
What is Franchising & How Does it Work?
Franchising is a license that allows the franchisee access to the franchisor’s business operations and trademarks and allows you to sell products and services using their brand name. In exchange, the franchisee agrees to the terms and conditions set by the franchisor and pays the franchisor a franchising fee.
In Malaysia, all franchise businesses are governed by the Franchise Act 1998.
Before franchising existed, you would have had no option but to set up your entire brand and business from scratch. You must put time and effort into your company branding, marketing, productisation, operations, supply chain management.
Franchising vs Licensing
Licensing is sometimes used interchangeably with franchising; however, they do not mean the same thing. Whereas businesses operating under a franchise system in Malaysia are governed by the Franchise Act 1998, licensing businesses are not. They are instead governed by the more widely used but generic Contract Act 1950.
While the regulations for franchise businesses are specific for every franchise business, the terms of the licensing contract between the licensor and licensee are stipulated.
As such, businesses operating under a franchise system allow the franchisor much more control than those under a licensing system.
However, it is worth noting that a business can still be governed by the Franchise Act 1998 if it operates like one, even if unlicensed.
Franchising vs Chain
When seeing a brand with many outlets, many people immediately assume it’s possible to open one using the franchise model. This is especially true for brands with a large presence and customer base.
In reality, not all brands with many outlets operate using the franchise model. They operate using a chain store model where all outlets are owned by the company that owns the brand. Popular brands like Watson’s and FamilyMart operate using this model.
It is unfortunately not possible to own an outlet from a brand that operates using a chain store model.
Cost of Starting a Franchise Business
When starting a franchise business, a few types of costs will be incurred. Some of these costs are specific to franchises, while others are typical for any business.
Franchise-specific costs include one-off fees like
- Franchise fees
- Security deposit
- Cost of equipment
- Initial stocks
And ongoing monthly fees like:
- Royalty fees – a monthly fee, usually a % of your overall sales
- Marketing or advertising fees – for overall brand marketing and campaigns
On top of these are the more general expenses related to store opening, such as
- Rental & utility deposits
- Renovations & furniture
- Monthly rental
- Employee salaries
With so many variables at play, the cost of starting a franchise in Malaysia can vary greatly. For example, opening a Mixue outlet costs around RM300,000, while opening a McDonald’s outlet costs approximately RM5 million.
Requirements to Open a Franchise Business
The requirements for opening a franchise business differ from franchise to franchise. However, most franchisors require the franchisee to have enough capital ready and operate within an area the franchisor prefers.
Prior business experience is a bonus but not usually a prerequisite for most franchisors. The franchisor is expected to train the franchisee and their employees on how to operate the franchise daily.
Advantages of Franchise Business
Established brand and business
The most significant advantage of buying a franchise is that you don’t have to start from scratch. The franchisor will share everything with you, including their trade secrets. You can hit the ground running in months instead of years.
Training & support
You’ll be guided by your franchisor’s experienced team on how to run and operate your business.
Proven business model
In most cases, franchise businesses already have a proven business model, which includes a well-honed product or service. This means you’ll more likely be able to be profitable without having to spend time perfecting your offer.
Disadvantages of Franchise Business
High cost
As we’ve seen earlier, starting a franchise business easily costs 6 – 7 figures, which is substantial if your starting capital is low.
Negative brand sentiment
Sometimes, the franchisor’s brand sentiment can backfire and cause their franchisees’ businesses to suffer. A recent example is the politically fueled boycotts of McDonald’s and Starbucks, which negatively impacted the businesses of their Malaysian franchisees. In the case of Starbucks, its local franchisee Berjaya Group’s 9-figure losses in 2023 were mainly attributed to nationwide Starbucks boycotts.
Rigid contracts
There may be stipulations in a contract that are rigid enough to land you in hot waters when you don’t comply.
This is precisely what happened to then-Chatime master franchisee Loob Holdings when Chatime brand owner La Kaffa found them sourcing unapproved raw materials in 2017. In the end, Loob rebranded all their outlets to a completely new brand, Tealive.
Should You Invest in a Franchise Business in Malaysia?
Buying a franchise business can be one of the most expensive ways to start a business in Malaysia. You typically need to prepare a 6 – 7 figure capital if you want to partner with a well-established brand. While you will be selling products or services from a brand with a ready customer base, as well as receiving assistance with your store setup and operation, it is still possible to fail if you do not have the right skillset.
Hence, it is best to consider your capital available and your current level of skillsets before leaping into a franchise investment.
Do you run a franchise business? Would you recommend it?
Investing in a franchise business can be costly. If you have experience running one, share your best tips below!