What is and why franchise?

Franchising is one of the many ways to do business in Saudi Arabia. Through franchising, small investors are able to
use the name of global brands of good and services. Upon the other hand, these big companies are able to tap the
local market by creating franchise opportunities in Saudi Arabia.

Many entrepreneurs choose this business model because of the lower risk involved and good rate of return. After all,
when a business is franchised, you have an established name to back you up. In a standard franchise contract, the
franchisee becomes entitled to the experience of the franchisor - or trade secrets, so to speak. Franchisors provide
advice on the different facets of the business such as in finance, accounting, legal, among others. The other thing
that makes franchising so attractive to investors is the good standing that comes with it. Without a question, it is far
easier to obtain a loan from banks and other financial institutions if you carry a well-known brand than representing
a start-up.

Franchises are open to almost all industries. Some of the more popular global franchises in Saudi Arabia are
Starbucks, McDonalds, Chipotle, Zara and Apple. But perhaps the most common franchised businesses there are
relate to food such as restaurants and coffee shops. Locally, Albaik is an example of a home-grown fast-food joint
that can be arguably called the McDonald’s of Saudi Arabia. From its humble beginnings in Mecca in 1990, Albaik
is able to expand and operate in all of Saudi Arabia through franchised chain of restaurants.

How to franchise?

Like Albaik, how does one begin to expand through franchising? At the very heart of it is the franchise itself. A
franchise agreement is an undertaking between a franchisor and a franchisee. Normally, the franchisor obliges itself
to grant the use of its tradename and trademarks, as well as share the technical know-hows in running the business,
in consideration of substantial payment by the franchisee.

Saudi franchise agreements are regulated by law, more particularly the Franchise Law of 2019. It provides that all
franchise agreements must be in writing, in Arabic, and must contain the twenty (20) standard provisions that it
prescribes.

Moreover, experience is a condition before a franchise may be granted in the Kingdom. The business to be
franchised must have been operated in accordance with the Franchise Operations System for at least one (1) year
and by at least two (2) persons (which may include the Franchisor or any of its related entities, or in two (2) separate
units. Similarly, the franchisees are not allowed to offer sub-franchises unless it or the sub-franchisee has had at
least 1 (year) of experience in the Kingdom.

Registration is also a requirement for franchises in Saudi Arabia. Franchise agreements must be registered with the
proper authorities.

Franchise Disclosure Agreement (FDD)

The law obliges the franchisors to provide the frachisees with a Franchise Disclosure Document at least 14 days
before the execution of the contract or receiving the consideration for the franchise. This document contain vital
information to make sure that franchisees are appraised of their rights and duties prior to entering the agreement. On
the other hand, a franchisee’s rights to the franchise is not absolute. Franchisors must have access to business
facilities of the franchisee. The latter must also seek the former’s approval if there is any change to the goods or
services or the business strategy that it wants to implement. Prior approval by the franchisor is also required when it
comes to the location of the business.

The relationship of the parties

The Franchise Law of 2019 also prescribes standards when it comes to transfer of properties, life of the contract, and
compensation. Parties, however, are free to stipulate otherwise. Normally, if the termination of the contract by the
franchisor is based on grounds specified by law, there is no obligation for it to repurchase the properties conveyed to
the franchisee. If the termination is otherwise based, then the obligation to repurchase arises, without prejudice to
the right of the franchisee for compensation.

There is no application of the Commercial Agency Law between the parties in a franchise agreement. This is a new
rule brought about the the Franchise Law of 2019, and one that parties must bear in mind.