The creation of the Saudi Franchise Law earlier this year is revolutionizing the nation’s industry.
The Middle Eastern market is always important. The biggest well-known brands are operating therein at least a few different countries, and the market is evolving with a strong economy and a high growth rate. Saudi Arabia alone represents almost 60 per cent of the market with a huge potential in many business sectors, especially after the launch of the Saudi 2030 Vision and the way the country has transformed.
After more than a decade of waiting, the Saudi Franchise Law has recently come into effect on April 22, 2020. This law consists of 11 articles divided into 27 sections. Throughout the past couple of years, the government has been studying different countries’ franchise models and has concluded a benchmark for the franchise law in the world. Certain individuals will come to see that the Saudi Franchise Law has a lot of similarities to the U.S. franchise law, one of the differences being that the franchise law in Saudi Arabia is shorter. It seems that the Saudi government’s strategy is to launch a basic regulation that could be followed and applied smoothly and with time it can be developed and upgraded.
The franchise law in Saudi Arabia would help solve many different issues that national and international franchisors and franchisees are currently facing. Franchising is a great model for expanding a successful business model and minimizes the risks for investors. But in some cases, some brands in Saudi Arabia have managed to sell franchises purely based on a person who has shown interest in the brand, even though the brand is only just in their launching stage, without any system, track record of success, operation manuals, or any franchise set up.
Others have done even worse. They have franchised their business based off of a name, idea, or just a logo! Before revealing the franchise law, no law or regulation could stop or punish such business practices, as all of the franchise agreements, at that time, used to be registered under the Saudi Commercial Agencies Regulation, which is far different in terms of relation structure, duties for both parties and other regulation that allows such a deal or agreement.
Even in contract termination or ending relations, franchisors and franchisees have no law to regulate and govern the exit between both parties in a way that protects the franchisee’s nor the franchisor’s rights. For the franchisee, if they are doing well, the franchisor might not want to renew their contract-based off an invalid reason. The franchisor might be deceiving the franchisee as they may want to manage the existing franchise themselves, or they might have found another franchisee who could pay more after seeing successful results.
“Saudi government’s strategy is to launch a basic regulation that could be followed and applied smoothly and with time it can be developed and upgraded”
In reality, the franchisor will not confront the franchisee about their true intentions. Hence, injustice in the previous franchise system. On the other hand, a franchisor who may want to terminate a non-committed franchisee’s agreement could struggle for years just to force a franchisee to close down or change the store signage, that has the franchisor’s trademark or brand. Either way, it is clear that the situation before was quite complicated. But not anymore!
Going through some of these articles and sections in the Saudi Franchise law, there are common things that most people are familiar with in the franchising business such as the Franchise Disclosure Document (FDD). It should be handed over to potential franchisees more than 14 days prior to signing the franchise agreement or paying any franchise fee to the franchisor. The FDD should include things such as franchisor partners, their financial status, debts, or any legal cases against them. It should also reflect their unit’s performance and the franchisee’s list. Both FDD and franchise agreements must be in the Arabic language before uploading them to the Saudi Franchise Centre.
Check your FDD
The main challenge that franchisors and franchisor lawyers are facing is ensuring that they are doing the right thing to make sure that all FDDs have been done correctly, without any errors that franchisees might find later. Regardless of the FDD’s content explanation of the law, this is still a new thing that the entire county is witnessing. Franchise lawyers and consultants are trying their best to ensure that they cover all the elements with detail to make certain that all legal processes are done correctly. It is a new experience and there must be a learning curve with more stories and cases to evaluate, where both lawyers and franchisors can learn and develop from them even further.
There are other articles in terms of when a company would be qualified to franchise legally. Article 3 Section 5 says the franchisor should practice the business for one year alternatively and that they should have more than one unit. Comparing this article to the U.S. franchise law or other laws, the Saudi law is quite lenient regarding that rule. However, it is not recommended that a franchisor starts his franchising journey so quickly, without really building a robust business, as this usually takes longer than one year with operating many outlets or locations. Obviously, the new Saudi franchise law would make a smoother, easier start. Furthermore, it is expected that such an article could be changed soon.
Regarding the master franchisees who are looking to sub-franchise in Saudi Arabia, by law, they should run at least one unit for a year before they are allowed to legally sub-franchise. There have been many cases in the past where the master franchisee signs a franchise for the sake of investment, so they start sub-franchising immediately after signing a master franchise agreement.
“There have been many cases in the past where the master franchisee signs a franchise for the sake of investment, so they start sub franchising immediately after singing a master franchise agreement”
The law here focuses on the added value of the master franchisee and regulate their duties towards the sub-franchisees, where they should be able to provide the required support to contribute to their sub franchisee’s success. Indeed, if the master franchisee has not practiced the business by themselves, especially when the master franchise is from an international brand, they have not proven the feasibility of the business nor the local model before the sub franchising the brand.
One of the dilemmas in the Saudi franchise law is that the law and its articles do not mention anything about the existing franchise agreements that were signed before April 22, 2020. So in the case of any dispute or cases raised to the court, how will the court act upon these contracts? Would it take into consideration that these franchise agreements were signed before the effect date of the franchise law? Or will judges consider using the current franchise law?
Lawyers and legal experts predict that courts would handle these situations case-by-case and find the appropriate way to resolve each dispute between franchisors and franchisees. Other individuals think that the franchise law could be updated soon, to provide a mechanism of franchise agreements that have been formed prior to announcing the new Saudi franchise law. Launching a new law is not an easy mission.
There will always be a learning curve that must take place. This is a natural route for any evolution or any major development that any country would face when launching a new law. In five years, entrepreneurs, franchisors, and franchisees can see a positive outcome when things get settled. Eventually, the main objective will be to protect all stakeholders’ interests and develop the franchising sectors that could contribute to the GDP and economy of Saudi Arabia.
THE AUTHOR
Fadil Alnassar is CEO of Franchise ME.
