A few weeks ago, I was advising a licensee who had entered into a business relationship with what can best be described as a look-alike franchise business.
I use the term “look-alike franchise” because, although the parties had signed a license agreement in November 2024, the substance of the relationship contained the key elements of a franchise as defined under Section 4 of the Franchise Act 1998 (Malaysia). The business commenced operations in April 2025.
After only five months of operation, the licensee’s business was already struggling. The primary reason was the licensor’s failure to deliver on their promises and obligations. Despite repeated correspondence through the group WhatsApp chat, very little was done to resolve persistent issues relating to supply, management, and operational support.
Weaknesses of the Licensor
As events unfolded, the weaknesses of the licensor became increasingly clear:
(a) Unproven Business Model – Only one company-owned outlet in operation, with no evidence the concept could be successfully replicated.
(b) No Central Kitchen or Supply Chain – Licensees were left to source ingredients independently, leading to inconsistencies.
(c) Absence of Franchise Infrastructure – No operations manual, no structured training, and no onboarding process for licensees.
(d) Weak Supply Network – No centralised or approved vendors, resulting in inconsistent product quality and pricing.
(e) No Brand Equity – The brand had little to no market recognition, leaving licensees to shoulder marketing efforts on their own.
(f) Financial Instability – The licensor relied heavily on license fees rather than revenue from the core business.
(g) Misrepresentation and Overpromises – Projected profits and promised systems never materialised, amounting to potential contractual misrepresentation.
(h) Lack of Support and Monitoring – No performance tracking, site visits, or operational audits; complaints went unanswered.
(i) Lack of Industry Expertise – The licensor’s team had minimal F&B or brand management experience, with no knowledge of food safety or scalable operations.
These shortcomings made it clear that the licensor was fundamentally unprepared to support licensees. As a result, the licensee suffered significant operational and financial losses. By the time the licensee sought my assistance, the business was collapsing due to systemic failures in the so-called licensing arrangement.
Legal Breaches
From a legal perspective, the arrangement gave rise to breaches on multiple fronts:
1. Statutory Breach
Under Section 6 of the Franchise Act 1998, it is mandatory for a franchisor to register the franchise with the Registrar of Franchise before making any offer or sale of a franchise. By disguising the arrangement as a “franchise” despite fulfilling the criteria under Section 4, the licensor failed to comply with statutory requirements.
2. Contractual Breach / Misrepresentation
The licensor made representations and promises, including operational support, supply arrangements, and profitability expectations, which were never fulfilled.
Such failures amount to misrepresentation and breach of contractual obligations.
Moral of the Story
This case highlights a painful but important lesson: do not rush into licensing your business simply in the hope of getting rich. A poorly prepared licensor not only jeopardises their own future but also causes their licensees to suffer greatly, nobody is a guinea-pig.
Before offering your concept as a license or franchise, evaluate yourself honestly:
• Do you have a proven and sustainable business model?
• Have you built the necessary infrastructure supply chain, training, manuals, systems, and support?
• Are you financially and operationally stable enough to guide others?
• Are you compliant with the legal framework governing franchises and licensing?
If the answer is “no,” then you are not ready to expand. Moving forward prematurely can lead to serious repercussions, collapsed businesses, broken promises, statutory offences, contractual liabilities, and irreparable loss of trust.
In short: build a solid foundation first, then grow responsibly.