The risks and benefits of running a franchise business
With the growing appetite for investment and trade in the Kingdom, as well as the stimulating environment for entrepreneurs and business startups, franchise contracts have emerged as an increasingly popular business model.
There is no standard definition of a commercial franchise agreement, but in its simplest form it is a contract between a franchiser and a franchise, whereby for a fee the former allows the latter to use technical knowledge or intellectual property for the distribution of products or services under a brand name that the franchiser owns and is often known globally.
Commercial franchising began in Saudi Arabia in the late 1970s and flourished significantly in the early 1990s. Franchises are now widely spread throughout the Kingdom in the form of, for example, internationally known restaurant chains and technology companies.
The enthusiasm of entrepreneurs and traders for commercial franchises may be attributed to their low-risk nature, as well as the financial benefits for both parties. The franchisee gains from the administrative experience of the franchiser, who can provide advice on issues such as finance, accounting and the law. Also, a well-known brand or trademark will help the franchise with marketing and promotion. Another important benefit of the franchise is the relative ease of obtaining funding from banks or financial institutions, because of the history of the business and its approved management mechanisms. Meanwhile, the franchiser benefits from the broad and rapid spread of the brand.
On the other hand, the franchisee may face some disadvantages, such as high initial fees demanded by some franchising companies, or the lack of independence in developing new ideas or original products; while most franchising companies do not prohibit this, they nevertheless retain the final say. Another downside for the franchise is that the franchising company may insist on a monopoly in the supply of products; the franchisee may be able to obtain them at lower prices, but is obliged to adhere to the purchase agreement with the franchising company.
These franchising companies also risk deterioration in the quality of their goods and services in a specific geographical area, if the franchise is negligent or fails to follow the agreed business practices.
Nevertheless, despite the risks, commercial franchising contracts have had an enormous impact on economic development in line with the Kingdom’s Vision 2030. Saudi Arabia encourages and supports young people in launching business projects that raise the level of local employment, and help to train budding entrepreneurs in the fundamentals and mechanisms of sound management.
To support such projects, there have been commercial franchise initiatives such as the Social Development Bank and the regional commercial franchise shows and exhibition, which aim to support SMEs and entrepreneurship.
The Ministry of Trade and Investment has also issued a draft of the new Saudi commercial franchise law, which it is hoped will cover many aspects of these contracts, from the drafting of the agreement and its terms, to the powers of the parties and the termination of the contractual relationship between them.
We look forward to the export of Saudi brands to countries around the world using the franchise system, the spread of innovations by our ambitious young people and an increase in the Saudi workforce, all of which will contribute to a balanced workplace environment and success in the fight against unemployment.
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