Everything you need to know about the Saudi franchise law

Saudi Arabia is the biggest market in the Middle East, comprising more than 60 per cent of most industries in the region; whether retail, F&B, or other services. The market size, population, and economic growth and size are huge. Saudi Arabia today is gaining a great public image and it is becoming a top location for global development.

The 2030 vision, led by HH Prince Mohammed Bin Salman Al- Saud, has transformed the country in many different ways. One of the biggest changes that impacts the country is the franchise law.

The Saudi Arabia Franchise Law came into effect on 22 April, 2020. The law consists of 11 Articles divided into 27 Sections. After studying different countries’models and doing a benchmark for the franchise law in the world, lawyers would notice that the Saudi Franchise Law has a lot of elements and similarity to the U.S. franchise law – with the main difference being that franchise law in Saudi Arabia is shorter.

It seems that the strategy is to launch a basic thing then update and upgrade the law to make it easier to follow and to develop.

Franchise law benefits

The franchise law in Saudi Arabia helps to solve many different issues and problems that international and national franchisors are currently facing, as well as other franchisees who are facing their problems from their side, too.

Franchising is a great model for expanding a successful business, and minimizes the risk for investors. But in some cases, brands in Saudi Arabia managed to sell franchise just because a person showed interest; even though the brand is just in a launching stage without any system, track record of success, nor operation manuals or any franchisees set up.

> “The franchise law in Saudi Arabia helps to solve many different issues and problems that international and national franchisors are currently facing”

Some others did even worse: they franchised just a name or an idea, or just a logo! Before revealing the franchise law, no law or regulation could stop or punish such bad business practices as all of the franchise agreements at that time used to be registered following the Saudi Commercial Agencies Regulation, which is far different in terms of relation structure and duties for both parties, as well as other regulation that allows such a deal or agreement.

Even in contract termination or end of relations, franchisors and franchisees had no law to regulate and govern the exit between both parties in a way that protects franchisees, nor franchisor rights.

So for the franchisee, if they are doing well and a franchisor does not want to renew the contract because of fabricated reasons, there was nothing that could be done. Equally, for a franchisor that terminated a non-committed franchisee’s agreement, they might struggle for years to force the franchisee to close or to change the store signage that has the franchisor’s trademark or brand.

> “In five years, entrepreneurs, franchisors, and franchisees will see a very positive outcome when things get settled”

Law requirements

Going through some of the Articles and Sections in the Saudi Franchise Law, there are common things that most people are familiar with in franchising business such as Franchise Disclosure Document (FDD). This has to be handed over to the potential franchisee at least 14 days prior to signing the franchise agreement or paying any franchise fee to the franchisor.

The FDD should include common things such as franchisor partners, financial status, debts, or any legal cases against the organization. It should also reflect the unit performance and a list of existing franchisees. Both the FDD and franchise agreements must be in the Arabic language prior to uploading them to the Saudi Franchise Centre.

The main challenge that franchisors and franchisor lawyers are facing is ensuring that they are doing everything correctly, to ensure that all FDD is done properly without any gaps that franchisees might find later.

Regardless of the FDD’s explanation under the law, this is still a new thing that the entire county is witnessing and franchise lawyers and consultants are trying their best to ensure that they cover all the elements with details to ensure that all legal process is done correctly. It is a new experience and there must be a learning curve; more stories and cases will arise, where lawyers and franchisors can learn and develop further.

Economic impact

The Saudi Franchise law will solve a big problem that the government has been trying to solve for the last decade, which is the employment rate and finding jobs for locals. The Saudization rules have contributed to solving this issue, but no matter jobs you create, it will still be difficult to accommodate everyone. All first world countries develop their economy and solve the employment issue with creating and supporting more entrepreneurs.

As most of us know, franchising is the main supplier for business opportunities as it comes with systems, successful track records, and continuous support. This would increase the success rate for businesses and ensure that the start-up business success rate will increase rather than entrepreneurs creating their own business from scratch without any experience.

The government previously provided loans and grants to Saudis to start up their own business, but there was a big failure rate; no matter what support they provided, there was still this big failure rate.

The government realized that one of the most effective solutions is franchising. The challenge, then, was that if there is no franchise regulation, how could the government support a sector and fund it? This was the main driver that led the government to work on the Saudi Franchise Law.

Now, the government has different programs investing and supporting the market with more than $250m to support Saudis to have their own business rather than waiting for jobs. In this way, Saudis will be the job creators, rather than waiting themselves for a job.

Moreover, the country has expanded in many new cities and projects such as Neom, where it needs many services and business to be launched to support the government’s expansion plan.

Eventually, a big number of these concepts and service providers will be allocated in these new projects to enhance the lifestyle and supply the demand.

Implementation challenges

One of the dilemmas in the Saudi Franchise Law is that the franchise law and its Articles do not mention anything about existing franchise agreements that were signed before April 22, 2020. As a result, for any disputes or cases raised to the court, it’s uncertain how the court will act upon these contracts.

Would it take the consideration that these franchise agreements were signed before the affect date of the franchise law, or will judges consider the current franchise law? Lawyers and legal experts predict that courts would take these situations as case-by-case, and see the appropriate way to resolve such a dispute between franchisor and franchisee.

Some others think that the franchise law will be updated shortly to provide a mechanism for franchise agreements, so that there are guidlines for an existing agreement and how to update it or upgrade it to follow the new Saudi Franchise Law.

Introducing a new law is not an easy mission and there is a learning curve that must take place. This is a natural route for any evolution or any major development that any country faces when launching a new law or regulation to a new market or sector.

In five years, entrepreneurs, franchisors, and franchisees will see a very positive outcome when things get settled. The main objective is to protect all stakeholders’ interests and develop the franchising sector, which could contribute to the GDP of Saudi Arabia.