Before you expand in Middle East
Acknowledging the massive scope of franchising in the Middle East region comprising countries like UAE, Bahrain, Qatar, Kuwait, Oman and Saudi Arabia business owners across the globe are expanding here. Read on to have an insight into the legal and regula
The Middle East franchising market is worth USD 30 billion and is currently growing by 27 percent annually. The business owners across the globe can expand rapidly and align themselves with the growing economy of the Gulf States without considerable capital outlay and risk by way of franchise model. However, one significant factor that needs consideration before expanding globally via franchise route is the legal aspect of international franchising. It is therefore imperative for franchisors seeking expansion beyond borders to take an exhaustive overview of the prevailing legal environment for franchise business in Middle East.
Popular franchising formats in Middle Eastern
Before discussing the legalities involved while expanding in middle east let us first take into consideration the popular types of franchise businesses in middle east.
Business format franchises: Also called as service franchising where in the franchisor licenses the franchisee to sell its trademark goods and or services along with access to its detailed business format, operating system, marketing and training systems, accounting system etc. the businesses like f&b, education, beauty services falls under this category.
Product franchising: The franchisee sells products and/or services on behalf of the franchisor and functions independently with limited assistance. The businesses like retailing of jewellery, apparel, footwear and so on falls under this category.
License to manufacture: The franchisor may grant a license to the franchisee to manufacture products under its brand name in accordance with its specifications and quality standards to be sold in a selective market segment.
Most Middle East countries do not have explicit legislation pertaining to franchise business. Franchise business is governed by various laws including agency and trademarks laws. In UAE and Gulf region, the franchise agreement can be viewed as an agency contract. The franchisors are required to register the agency agreement with the Commercial Agencies register at the Ministry of Commerce and Industry. Some countries in the region have strict provision for model franchise agreement to be followed by the parties.
Kingdom of Saudi Arabia is an exception. The franchise law in the country came up in 1992 and it offers greater flexibility than commercial agency contract. However, the third-country sub-franchisee is not allowed. In addition, the commercial agency law applies to franchises in Saudi Arabia as well.
Preparing the franchise contract
All important points such as term, payment, territory, exclusivity and termination should be carefully drafted. Otherwise it may be tricky for the franchisor to get out of the arrangement in case of any dispute. Also, it is only in interest of the franchisor to disclose franchisor information to prospective franchisees although there is no prescribed format for such disclosure in Middle East. The nature of the franchise arrangements is primarily like an agency contract which provides extensive statutory protection to franchisees and local agents. This may put the terms of a written agreement between the parties out of place with regards to the position of the franchisor. Another key point is that the Middle East states are Islamic nations and the commercial transactions also follow the doctrine of Shari'a law. Therefore, in absence of any model of obligatory legal precedent, the implementation of legal rights is not easy. It also restricts franchisor’s ability to acquire rulings. Therefore, franchisors must look into the legal aspects of franchising and carefully select their future business associates. They should take services of competent legal experts who can take care of their franchise arrangements in Gulf.
Adherence to regional conventions
In case of international franchisors seeking expansion in F&B space in Middle East, there is a vital point to look out for which is to obtain halal certification. It calls for adherence to Islamic dietary laws, which regulate the preparation of food and specifically meats. Therefore, the international franchisors may have to sign new agreements with halal food suppliers.
Security of trademarks
The franchisors need to secure their brands name and trade name. They run the risk of potential misuse of the trade mark and other intellectual property rights by insincere franchisees. Ideally, the franchisor must refrain from permitting a franchisee to register trademarks and brand names before formally signing the agreement. International brand owners should also keep in mind that many Middle East countries do not allow the assignment of trademarks until they are duly registered.
Unlike domestic franchisors, international franchisors have to deal with foreign exchange matters also. It has to take into consideration the international currency exchange rules and convertibility issues. The terms of exchanging monies need to be clearly laid out relating to preferred currency, the mode and frequency of receiving royalty payment, tax considerations. Moreover, franchisor should take appraisal of probable regulatory or trade restrictions, if any in the region.
To conclude it can be said that international franchisor must vigilantly scrutinise all legal angels of franchise business. It is only in franchisor’s interest to take extra care even when the concept of franchising has not been legislatively explained in the country where it seeks expansion. International franchisors generally have a long term outlook. Therefore, it is only imperative for them to lend sufficient degree of adaptability and maintain due diligence for development plans to meet the objectives of franchise expansion and desired growth.