The booming franchise businesses in Saudi Arabia

Franchising allows small investors to use the name of big and established local brands of goods or services

Container ship in import export and business logistic. Image used for illustrative purpose.

Container ship in import export and business logistic. Image used for illustrative purpose.

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Efforts are underway in Saudi Arabia to develop a stimulating business environment. The government has taken several measures in this regard, leading to a spur in franchising.

Franchising allows small investors to use the name of big and established local brands of goods or services. This commercial arrangement also allows international companies to access the local market and allows local businessmen to make safe investments by bringing the best services and international brands to the Kingdom.

Franchising in Saudi Arabia began in the late 1970s and flourished significantly in the early 1990s. A large number of franchises of international companies now operate across the Kingdom. Saudi Arabia has franchises — of top restaurants to IT companies — in almost every major city.

Many entrepreneurs prefer commercial franchises mainly due to the lower risk involved and the good rate of return for both parties. In these commercial deals, the franchisee benefits from the managerial experience of the franchisor, who can provide advice on multiple issues and aspects including finance, accounting, and legal matters.

Another reason for the popularity of such agreements is the relative ease of obtaining financing from banks or financial institutions, due to a company’s history and approved management mechanisms.Today, we will briefly review the litigation and bankruptcy procedures required in the franchise disclosure document.

Compatibility and consensus are the key to success for both parties in such deals. The Franchise Law defines the legal framework within which a party is supposed to work. There are certain obligations on both parties to the contract to ensure the smooth functioning of the business.

The law obligates a franchisor to inform the franchisee of any changes or amendments he makes to the disclosure document at the earliest opportunity. It may include any changes to the facts or in the circumstances that have a fundamental impact on the value and validity of the franchise.

One of the crucial aspects that need to be carefully assessed, in such commercial deals, is the financial performance of the franchisor. It should give a clear picture of a franchisor’s financial health, as it forms the basis for future business predictions for a franchisee.

It is also important to consider the possibility of income disparity between franchises based on factors such as geographical location.

The litigation clause is the most important element in a franchise disclosure document. It contains all the details related to any current lawsuit or arbitration against the franchisor or his group members.

It deals with any breach of the agreement, the contract’s termination mechanism, its renewal without a legal reason, fraud, violations of the competition law inside or outside the Kingdom.

The clause also deals with the provisions of the Franchise Law in the Kingdom, or the franchise laws outside the Kingdom, or the details of any judgment or decision issued in any judicial or arbitration lawsuit against the franchisor in the last five years.

The disclosure document also includes bankruptcy regulation procedures.

A franchisor should disclose whether he has undertaken certain actions during the last 10 years such as initiating any preventive settlement procedure or financial reorganization according to bankruptcy laws in the Kingdom or outside, or if the franchisor is a party to any agreement with creditors to reschedule or rearrange debts.

• Dimah Talal Alsharif is a Saudi legal consultant, head of the health law department at the law firm of Majed Garoub and a member of the International Association of Lawyers. Twitter: @dimah_alsharif

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