In a strategic move aimed at enhancing the business environment and stimulating economic growth, the Saudi Cabinet approved a significant decision to suspend the application of a key requirement in the Franchise Law for specific categories of franchisors and franchisees. The decision stipulates that the requirement outlined in paragraph (1) of Article Five of the Law will not apply, thus opening new horizons for entrepreneurs and supporting expansion in promising economic sectors within the Kingdom.
Background of the decision and the context of commercial franchising in the Kingdom
This decision comes as part of ongoing efforts to develop the legislative and regulatory environment in the Kingdom of Saudi Arabia, in line with the ambitious goals of Vision 2030. The Commercial Franchise Law was issued in 2019 to regulate the relationship between franchisors and franchisees, providing a clear and transparent legal framework that fosters trust and encourages investment in this successful business model. Article 5 of the law stipulated a set of obligations for franchisors before signing an agreement or receiving payment, including the requirement that they have operated franchise businesses for at least one year through at least two points of sale—a condition that has now been suspended for certain categories.
Objectives of the new exemption and its expected impact
The decision primarily aims to reduce barriers to entry into the franchise market, particularly for emerging and innovative local brands that may not meet the prior practice requirement. Through this exemption, the government seeks to achieve several key objectives:
- Stimulating entrepreneurship: The decision gives young people and owners of new ideas the opportunity to transform their projects into scalable brands through the franchise model, without having to wait a long time to prove their prior success.
- Supporting promising sectors: The exemption focuses on activities that fall within the sectors targeted in Vision 2030, such as entertainment, tourism, technology, and logistics, which accelerates the growth of these sectors and increases their contribution to the gross domestic product.
- Increase in the number of practitioners: The decision contributes to increasing the number of Saudi brands operating under the franchise system, which enhances competition, creates more job opportunities, and raises the quality of products and services offered in the local market.
Controls and conditions to ensure success
The decision was not made arbitrarily; rather, precise controls were put in place to ensure the protection of all parties and the achievement of the desired objectives. The decision stipulated that a franchisor benefiting from the exemption must submit a comprehensive and clear business model, including detailed operational manuals, an economic feasibility study, and a market analysis, thus increasing the project's chances of success and sustainability. The decision also included another crucial condition: the franchisor is not entitled to any financial compensation from the franchisee until the latter begins operating and generating actual revenue. This reduces financial risks for entrepreneurs in the early stages of their ventures.
Implementation and Governance Mechanism
To ensure the effective implementation of these regulations, the decision stipulated the formation of a specialized committee, chaired by the Ministry of Commerce and including representatives from the Ministry of Investment and the Ministry of Economy and Planning. This committee will review and evaluate applications for exemption, taking into account the project's innovative elements, its anticipated economic impact, and its ability to meet market needs. This structure reflects the integration among government entities to ensure that the decision serves the overall interests of the national economy and enhances the Kingdom's attractiveness as a leading investment destination regionally and internationally.
