In a strategic move aimed at reshaping the landscape of small and medium-sized enterprises (SMEs) in Saudi Arabia, recent amendments to the franchise law have revealed fundamental shifts, most notably the elimination of the prior experience requirement for certain categories of franchisors and franchisees. This government initiative seeks to enhance market flexibility and broaden the base of practitioners in vital economic activities, particularly those directly aligned with the objectives of Vision 2030 and its ambitious implementation programs.
A supportive economic context for entrepreneurs
These amendments come at a time when the Saudi economy is undergoing unprecedented transformation aimed at diversifying income sources and reducing dependence on oil. The franchise sector is a key pillar upon which the government relies to increase the contribution of small and medium-sized enterprises (SMEs) to the GDP, with the Vision 2030 goal of raising this percentage from 20% to 35%. Historically, the requirement of prior experience has been an obstacle for many new and innovative entrepreneurs seeking to enter the market, making the removal of this requirement for specific categories a significant boost to the economy.
Strict controls to ensure quality and sustainability
Despite the incentives offered, the amendments included stringent criteria to ensure the seriousness of the investment. They stipulated that the franchise activity must fall within promising sectors targeted by the government for increased investment, such as tourism, entertainment, technology, and logistics. The regulations also required the franchisor to submit a comprehensive business model that includes detailed instructions, a thorough market analysis, a feasibility study, and a practical operational manual. These requirements aim to protect franchisees from entering into ill-conceived projects, thereby increasing the chances of operational success and reducing the likelihood of business failure.
Stimulating innovation and reducing financial risks
In the context of supporting innovation, the new standards emphasized that the business activity must be innovative or contribute effectively to the development of the national economy and meet the needs of the local market. To reduce financial risks for investors, a fundamental principle was adopted: no payment is required for the franchise before the business actually commences operations. Instead, the payment is linked to the franchisee's actual revenue generation, as stipulated in the franchise agreement between the two parties. This approach reflects the legislator's desire to create a fair investment environment where risks are distributed equitably between the franchisor and the franchisee.
Administrative wisdom and a joint ministerial committee
To ensure the optimal application of these standards and prevent any manipulation, a specialized committee was formed, chaired by the Ministry of Commerce and including representatives from the Ministries of Investment and Economy and Planning. This committee directly oversees the implementation of the regulations and evaluates applications. The presence of representatives from these three ministries ensures integrated roles; the Ministry of Investment focuses on attracting capital, the Ministry of Economy ensures alignment with development plans, and the Ministry of Commerce oversees the legal framework, thus guaranteeing the desired economic impact and developing the Kingdom's franchise environment to compete with global standards.
