Franchising and licensing are common business expansion models. Both allow a business owner to grow beyond its original location by allowing another party to use certain intellectual property rights, such as a brand name, logo, business concept, training materials or other proprietary assets.

However, many business owners mistakenly treat franchising and licensing as if they are the same. Some also assume that if an arrangement does not fully comply with the requirements of a franchise, it can simply be called a “licensing agreement” instead.

This is a risky misunderstanding.

In law, the name given to an agreement is not conclusive. What matters is the true nature of the relationship between the parties. If the arrangement operates like a franchise in substance, it may still be treated as a franchise even if the agreement is called a licence.

The Main Difference: Control

The key difference between franchising and licensing lies in the degree of control.

In a licensing arrangement, the owner of the intellectual property allows another party to use specific intellectual property rights within agreed limits. The licensee usually runs its own business independently. It decides how to manage its operations, pricing, staffing, customers and commercial risks.

For example, the owner of a popular cartoon character may license the character, artwork and logo to a stationery company. The stationery company may then produce notebooks, bags or other products using the licensed character. In this situation, the licensor’s control is usually limited to how the intellectual property is used. The licensor may control matters such as quality, permitted products, territory and duration of use, but it does not control the licensee’s entire business operation.

Franchising is different. A franchise arrangement usually involves much more than permission to use a brand. The franchisor allows the franchisee to use its intellectual property, but also requires the franchisee to operate the business according to a prescribed system. This may include standard operating procedures, branding rules, training requirements, approved suppliers, pricing structures, marketing guidelines and quality control standards.

Why This Matters in Malaysia

Malaysia has specific legislation governing franchises, namely the Franchise Act 1998 (“Act”). Under the Act, a franchisor is required to register its franchise business with the Registrar of Franchise and comply with the relevant disclosure and regulatory obligations before offering or operating a franchise in Malaysia.

This means that if a business arrangement falls within the legal definition of a franchise, the parties cannot avoid the Act merely by calling the agreement a “licensing agreement”.

The Malaysian Court in Dr HK Fong BrainBuilder Pte Ltd v SG-Maths Sdn Bhd & Anor [2021] 1 MLJ 549 affirmed that the court will examine the actual operational structure of the arrangement, rather than merely relying on the label used by the parties.

In other words, if the arrangement looks like a franchise and operates like a franchise, it may be treated as a franchise under Malaysian law.

The Risk of Misclassification

Misclassifying a franchise arrangement as a licence may create serious legal and commercial risks.

If the arrangement is in substance a franchise, the franchisor may be required to comply with the Franchise Act 1998. Failure to do so may expose the franchisor to regulatory consequences. It may also affect the enforceability of the agreement and create disputes between the parties.

For business owners, the risk is not only legal. It is also commercial. An improperly structured arrangement may affect expansion plans, investor confidence, brand control, exit rights and dispute resolution.

Conclusion

The difference between franchising and licensing is not merely a matter of wording. It is a matter of substance.

A licensing model generally gives another party permission to use intellectual property rights with limited control over that party’s business operation. A franchising model involves a stronger degree of control, where the franchisee is required to operate the business according to the franchisor’s system.

Ultimately, the law looks at what the parties actually do in practice. If the business operates like a franchise, it may be treated as a franchise under the Franchise Act 1998, regardless of whether the agreement is called a licence.

Businesses should therefore seek proper legal advice before adopting either model, especially where branding, operating procedures, training and ongoing control are involved.

Prepared by Victor Tai and Ooi Zhi Ping