The franchise system in Saudi Arabia regulates the relationship between the franchisor and the franchisee while providing necessary protection for both parties. An important development in this regard is the amendment to the annex of disclosure document requirements included in the executive regulations of the franchise system, as per the Minister of Commerce Decision No. 339 dated 14/8/1444H.
It is noteworthy that the document is called a "disclosure document" because it involves disclosing the key rights, obligations, and material risks related to franchise opportunities.
The disclosure document must contain essential requirements and will not be considered compliant or complete without all these requirements. We will detail them as follows:
The introduction must include the following:
A. Identification of the document as the "Disclosure Document."
B. The following text: "The Disclosure Document contains information that helps the potential franchisee make a decision regarding entering into the franchise agreement. It is important to read its terms carefully, and additional inquiries related to the franchise opportunity can be directed to the franchisor, current franchisees, and specialized legal and financial advisors before signing the agreement."
C. The name of the franchisor.
D. A description of the business to be conducted under the franchise business model.
E. The date the disclosure document was prepared.
A clear table of contents for the disclosure document, indicating the page number where each element of the document begins, including the franchise agreement model as an attachment to the disclosure document.
First: Clarifying the following data of the franchisor:
Trade name.
Address and contact details.
Trademark or trade name associated with the franchise business model.
Date and place of establishment.
Owner of the franchisor.
Second: Information about members of the franchisor's group whose products or services the franchisee will use:
Trade name of each member.
Address of each member.
Relationship of each member with the franchisor.
Products or services to be provided by each member.
Third: If the franchisor has acquired franchise business in the last ten years:
The date of acquisition of the franchise business.
The name of the acquired party.
First: A statement of the franchisor's operational experience over the last five years, specifically:
The franchise business subject to the potential agreement.
Other franchise businesses.
Second: A list of the current board members and senior executives of the franchisor responsible for franchise operations, detailing the following:
Job title and employer over the last five years.
Experience related to franchise business and working for the franchisor.
Master Franchisor
First: If the franchisor is a master franchisee, the following data about the master franchisor must be mentioned:
Trade name.
Address and contact details.
Relationship with the master franchisee.
Second: A historical statement of franchise business over the last five years.
Third: The following information regarding the agreement between the franchisor and the master franchisee:
The geographical scope of the agreement, rights, and obligations of each party, and the right to grant sub-franchises.
The expiration date of the agreement and whether it is renewable.
Termination conditions of the agreement.
Impact on the potential franchise agreement in case of termination of the main franchise agreement.
First: Details of any current legal or arbitration proceedings against the franchisor or its group members regarding their participation in the franchise business model, whether initiated by an investigative authority, or under administrative, criminal, civil, or arbitration procedures, alleging any of the following:
Breach of or termination of a franchise agreement, or non-renewal without a legal or legitimate reason.
Fraud.
Violations of competition laws in the Kingdom or abroad.
Unlawful or fraudulent practices.
Violations of the franchise system or its regulations in the Kingdom or abroad.
Second: Details of any judgment or decision issued in any legal or arbitration proceedings against the franchisor or its group members regarding their participation in the franchise business model for any of the matters mentioned in the previous paragraph over the last five years.
A statement whether the franchisor or any of its group members in the last ten years:
Has undergone any preventive settlement or financial reorganization procedures under the Bankruptcy Law in the Kingdom.
Has undergone any restructuring procedures, including preventive settlement or financial reorganization under any foreign bankruptcy laws.
Has been a party to any agreement with creditors for debt rescheduling or restructuring.
First: If the franchisor requests the franchisee to pay an amount before entering into the franchise agreement, it must state whether this amount is refundable.
Second: For each payment due from the franchisee to the franchisor after entering into the franchise agreement, the following must be mentioned:
Description of the payment.
The amount.
The payment date.
The total estimated costs that the franchisee will incur to start the franchise business, if known to the franchisor. Examples of these costs include:
Establishment works.
Development works.
Redesign and decorations.
Purchasing or leasing equipment.
Inventory and supplies.
Technology.
Insurance and employees.
In addition to the capital required to start the franchise business. If the franchise business will be operated outside the Kingdom, costs may be estimated according to the country where the franchise business model will be operated.
The franchisor is obligated before signing the agreement with the franchisee to specify the remaining costs required under the regulations based on the geographical area, the size of the franchise unit, the number of employees, and other variable data.
The income among franchises may vary, and potential or previous information is of a general nature. Each franchisee should consider the specific circumstances and the geographical scope in which the franchise business is practiced.
First: Determine whether the franchise is exclusive or not.
Second: Details of whether the franchise business has been previously conducted in the franchise area granted by the same franchisor in the last ten years, along with details of such business and the reasons for cessation.
First: Statement of any policy of the franchisor regarding the selection of the franchise business location.
Second: The extent of the franchisor's assistance to the franchisee in selecting the location and negotiating its purchase or lease.
Third: Regarding the franchise business location:
The obligations of the parties before opening regarding the selection of the location or the construction and equipping of the premises.
The extent of the franchisor's or franchisee's obligation to approve the location and the conditions related to approval.
Fourth: Statement of whether the franchisor has obligations towards the franchisee regarding assistance in constructing the premises and any modifications, along with specifying the scope of assistance.
First: The number of franchise businesses operated under the franchise business model at the beginning and end of each of the last three financial years, inside or outside the Kingdom, whether owned or operated by the franchisor, a group member, or a franchisee.
Second: The number of franchise businesses operated under the franchise business model that opened or closed in the Kingdom at the beginning and end of each of the last three financial years, whether owned or operated by the franchisor, a group member, or a franchisee.
Third: The address of each current franchisee in the Kingdom.
First: Data on the trademarks used to distinguish the franchise business model and any other intellectual property rights related to it, as follows:
Description of the intellectual property right.
Owner of the intellectual property right, the powers granted to the franchisor to use it and license its use if the franchisor is not the owner.
If the intellectual property right is registered in the Kingdom, the date, number, and place of registration must be stated.
Detailed statement of any current or pending legal or claims procedures regarding the intellectual property right that may significantly affect its ownership or use.
Second: If the franchisor has rights related to confidential information or trade secrets, a general description must be provided to the franchisee along with the mechanism for using them.
First: Mention the following details:
Any requirement for the franchisee to maintain a certain level of inventory or purchase a minimum amount of goods or services.
Any ownership by the franchisor or any of its group members of rights in any supplier from which the franchisee may be required to purchase goods or services.
Any obligation for the franchisee to accept goods or services from the franchisor, any of its group members, or any of its specified and approved suppliers.
The franchisor's commitment to supply goods or services to the franchisee if agreed upon.
Whether the franchisor has the authority to change the scope of goods or services, and the limits of this authority.
Whether the franchisor or any of its group members or any approved supplier (if any) receives discounts or financial benefits from third parties related to the franchisee and the extent of direct or indirect sharing with the franchisee.
Second: Clarify whether the franchisor will negotiate purchase arrangements with suppliers, including setting prices, for the benefit of franchisees.
First: Description of the rights and obligations related to marketing and advertising the franchise business, including whether the franchisor will cover any advertising expenses in the franchisee's area.
Second: If there is a marketing account or any other participatory account controlled or managed by the franchisor or by others for the franchisor's benefit, and the franchisee is obligated to contribute to it, the following must be stated:
The nature of the contributors to the account, for example, (franchisee - franchisor - external supplier).
The amount the franchisee must contribute to the account, and whether other franchisees must contribute different amounts.
Whether franchisor-owned outlets must contribute to the account, and if so, whether the contribution is the same as that of the franchisees.
The person controlling the account and responsible for its management.
The accounting management of the account and who is responsible for it.
The types of expenses the account can be used for.
The account's expenses for the last financial year.
Whether the franchisor must spend part of the account to promote the franchisee's business.
First: Whether the franchisee is entitled to compensation at the end of the agreement term and the mechanism for determining it.
Second: Details of any arrangements, if any, to be applied to unsold inventory, marketing materials, equipment, and other assets purchased when the agreement is signed, including:
If the franchisor purchases the inventory, marketing materials, equipment, and other assets.
The mechanism for determining prices if the franchisor is to purchase the inventory, marketing materials, equipment, and other assets.
Third: The franchisee's right to sell the business at the end of the franchise agreement.
In conclusion, the disclosure document is a significant positive step in enhancing transparency and protecting the rights of potential investors, as it enables them to make decisions based on clear facts, which in turn contributes to establishing sustainable business relationships and achieving Saudi Arabia's Vision 2030.
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