Developing or expanding your retail business in Saudi Arabia
Over the most recent years, a large number of international brands have expanded their retail business into Saudi Arabia, and various franchising models such as for example the master franchising model, the direct unit franchising model and the area development/multi-unit operator model have been used.
Based on the common use of the franchising models by international franchisors, the authorities in Saudi Arabia have recently adopted and implemented a detailed franchise legislation.
The new franchise legislation in Saudi Arabia was issued under Royal Decree M/2 dated 09/02/1441H. Under this franchise legislation, an implementation regulation (1441H - 2020CE) was issued.
It appears that the new franchise legislation has been inspired by the pre-disclosure requirements and the franchise legislations in countries like the US, Canada and Australia.
A franchise under the new legislations franchise is defined as "an arrangement under which a person called a Franchisor grants another person called a Franchisee the right to conduct a business - the subject matter of the Franchise - for its own account in association with a trademark or tradename, owned by or licensed to the Franchisor and includes the provision to the Franchisee of technical expertise and knowhow and determining the manner in which the business is to be operated; in return for cash or non-cash consideration, other than amounts paid by the Franchisee to the Franchisor in consideration of the goods or services so provided."
The new franchise legislation is mandatory and cannot be waived by the franchisee.
As illustrated in brief below, it can be very costly for the international franchisor not to comply with the new franchise legislation in Saudi Arabia.
Key points from the new franchise legislation and the implementation regulation:
- Entry barriers as a Franchise opportunity may neither be offered nor a Franchise granted unless the business to be franchised has been operated in accordance with the franchise operation system for at least one year and by at least two persons (which may include the franchisor or any member of its group) or in two separate units.
- A franchisor shall provide the franchisee with a copy of a disclosure statement that procures the detailed requirements set out in the implementation regulation (see below) at least 14 days before entering into the franchise agreement or paying any considerations to the franchisor relating to the franchise, whichever occurs first.
- The disclosure statement shall contain detailed information regarding the franchisor and its group members, work experience, the main franchisor, litigation, bankruptcy procedures, amounts required to be paid to the franchisor, initial investment estimates, district and exclusivity, place of franchising business, the current franchisees, franchisor's financial information, intellectual property rights, supply of goods and services, marketing and advertising and expiration of the agreement period.
- The disclosure statement shall be in Arabic, or if drafted in a different language, an accredited Arabic translation shall be prepared.
- The franchise agreement and disclosure statement shall be registered with the relevant ministry within 90 days from the date of execution.
- In the event of a material breach by the franchisor of its obligations in relation to disclosure and registration set out in the franchise legislation and the implementation regulation, the franchisee may by written notice to the franchisor terminate the franchise agreement without being liable for any compensation to the franchisor within one year of becoming aware of the breach or three years from the date on which the breach took place, whichever is earlier.
- If the franchisor materially fails to comply with the disclosure or registration obligation determined in the franchise legislation and the implementation regulation, the franchisee may claim compensation from the franchisor for any loss suffered by it as a result of such failure.
- The franchise legislation contains mandatory regulation regarding, for instance, renewal, expiry, termination, transfer and compensation at termination.
The franchise legislation being so new, there is currently no court or administrative practice that can be useful when interpreting provisions in the new franchise legislation.
Please contact the Franchise team here at Plesner if you would like to know more or if you would like to discuss your expansion plans in relation to Saudi Arabia.