Kuwaiti restaurants have created a name for themselves in the international food and beverage industry, leading us to believe that Kuwait has not only become a hub for GCC tourism, but has also created food tourism! You might have also heard the recent news that Kuwait aims to be the food capital of the world by 2030!
There have been a surprising number of success stories from local small and medium sized restaurants that started out in Kuwait and have become international franchises. Although this all sounds very appetizing, how is the law involved? Does it make it easier for restaurants to grow and become franchises? Is it encouraging? Well, in order to answer those questions, we will have to understand franchise agreements.
It is common for me to get inspired to write my legal published columns from the stories that I am currently working on, and I could not be happier to be working with a number of SMEs that are expanding to be franchises. I believe that Kuwait has become a hub of not just tasty delicacies, but also for creative talents in general. Therefore, I believe we as a community have many more success stories to be shared, if only more people are brave enough to take the steps needed to move their enterprises out of Kuwait and make them international franchises.
Right to franchise
Question: How do I grant a party the right to franchise my business?
Fajer: A franchise according to the simple dictionary definition is an authorization granted by a company to another company allowing them to carry out specified commercial activities, for example acting as an agent for a company’s products.
Question: What are things to look out for when signing the franchise agreement?
Fajer: Before I answer your question, I would like to make two very important points clear:
a. Always, always, always hire a lawyer. I understand that a lot of small franchises would like to save money, especially that they are just starting out, but if you are about to grow and develop, then you are better off in the long term investing in a good lawyer.
b. Taking the step to franchise your business can be a big decision – you are going from a local business to an international brand. Therefore, I advise that you finalize other legal issues like the copyright of the SME’s logo and trademark, the SME’s internal policies, etc.
Things you should look out for in the agreement:
1. Royalty fees: It is a fee that consists of a percentage of the gross sale revenue of the business. For example, if a Kuwaiti restaurant franchises to Saudi Arabia, then the Kuwaiti owners will take a royalty fee, let’s say 10 percent, from the sales of the franchise in Saudi.
2. The term: The years that the contract is valid for is very important. This will depend on your mission and vision, so any term is valid.
3. Exclusivity: Do you want to give the agent exclusivity to your franchise in a certain area or not? There are pros and cons for this step. A large company that becomes your agent would have a bigger budget to spend on advertising, but might give less royalties, or that might mean that you cannot expand to other agents.
4. Staff: Issues to consider include would you be responsible for providing the staff? Or training the staff? Or are you going to take in the staff from any franchises that close down?
5. What country do you want the contract or franchise agreement to be under? Lawyers call it ‘jurisdiction of law.’ My advice is, as a general rule, always have your contract in the law you and your lawyer are familiar with. If your lawyer is practicing in Kuwait, than your contract should be under Kuwaiti law.
Question: Is it true that unlike other countries, Kuwait has no law for franchises?
Fajer: I would like to make clear the fact that there are no separate laws in Kuwait for franchises, and some companies therefore sign agency contracts, which I would not suggest as a starting step for SMEs that would like to expand, since the Kuwaiti law sides with the agent when it comes to agencies and that is why Kuwait has many monopolies in the market. With that said, this does not mean that franchises are not organized under Kuwaiti law; they are organized as contracts generally but not specifically. Also, there have been many new commercial laws in the past few years and a new law that allows international franchises to have more than one agent in Kuwait.
I hope the above was useful and I must say I am extremely proud to see Kuwaiti companies, although mostly restaurants that started as SMEs, grow and become successful brands.
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By Attorney Fajer Ahmed