2012/Vol.1/ No.4. FRANCHISE IN DUBAI. Dubai Business Guide. Operations.
Business Support Department. Dubai Chamber of Commerce and Industry ...
BUSINESS INFORMATION SERIES 2012/Vol.1/ No.4
FRANCHISE IN DUBAI
Dubai Business Guide Operations
Business Support Department Dubai Chamber of Commerce and Industry
Published by: Dubai Chamber of Commerce and Industry Business Support Department P.O. Box 1457 Dubai, United Arab Emirates Tel: 800 CHAMBER (2426237) Website: www.dubaichamber.com
Dubai Business Advisor © 2012 Dubai Chamber All rights reserved
Disclaimer: Information in this guide is obtained from sources deemed reliable, but no warranty – expressed or implied – is made on any part of its contents. While a good faith effort has been made to ensure the accuracy, timeliness, and completeness of the contents of this guide, we do not guarantee the information contained herein. Laws, rules, regulations, and procedures may change significantly with short notice, and this guide may reflect details that, while accurate at the time the information was gathered, could be currently no longer in effect or otherwise modified. Nothing in this guide should be construed as legal, accounting, or other professional advice and we will not be held responsible for any changes, omissions or inaccuracies in the information contained herein. Interested parties are urged to seek the advice of competent, licensed professionals in the appropriate area of expertise for any further questions regarding their specific circumstances.
ISBN 978-9948-430-46-9
Table of Contents 1.
Introduction ...................................................................................................................4 1.1 What Is Franchising ......................................................................................................... 4 1.2 Elements of Franchising .................................................................................................. 4 1.3 Traits of Franchisors ........................................................................................................ 4 1.4 The Franchise Scenario and Context in Dubai ................................................................. 4 1.5 The Advantages and Benefits of Franchising................................................................... 5 2. What Makes a Good Franchise? ......................................................................................7 2.1 The Franchise Relationship.............................................................................................. 8 2.2 Types of Franchises ......................................................................................................... 8 2.3 Ownership Structures Used in Franchising ..................................................................... 9 2.4 How Franchises Work ...................................................................................................... 9 2.5 Franchise Arrangement ................................................................................................... 9 3. A Typical Franchise System ........................................................................................... 10 3.2 Licensing ........................................................................................................................ 10 3.2 The Difference between a Distribution, License and Franchise Agreement ................. 12 3.6 Things to be Aware of When Selecting a Franchise ...................................................... 12 3.7 The Franchisor – Starting a Franchise Chain ................................................................. 13 3.8 Goodwill......................................................................................................................... 13 4. How to Open a New Franchise in Dubai ......................................................................... 14 4.1 What franchising laws are in place in Dubai?................................................................ 15 4.2 International Franchising............................................................................................... 16 4.3 Minorities and Women in Franchising .......................................................................... 17 4.4 Technology and Franchising .......................................................................................... 17 4.5 Dubai, GCC & MENA Franchises .................................................................................... 18 Conclusion ........................................................................................................................... 23 References........................................................................................................................... 24
1. Introduction Dubai is one of the fastest growing and dynamic markets in the world. Dubai is bursting with new commercial and residential property developments. The ultra-modern developments are attracting international attention. Business and trade is booming and international companies and people establish at the Emirate. Dubai has joined China as one of the fastest growing economies of the world. There are no capital gains, inheritance, income, or sales taxes in Dubai. Many visitors become residents and open new businesses in Dubai, where franchise opportunities are bountiful. Franchising is a business method to expand and distribute in markets. Franchising is a system of business that is steadily growing and accounts for more than one-third of the world’s retail sales. A franchise acts like a license for rapid expansion, a brand’s recognition and provides a consistent method to deliver your brand‘s promise. Franchises are based on a financial relationship between the franchisor and franchisee. This guide looks at what is franchising, how it works, why franchising is growing as a way of doing business and what makes a good franchise. Aside from a basic understanding of franchising, the guide considers the benefits given by a franchise and provides basic guidance to allow businesses to benefit from innovation. Franchising is not restricted just to fast food outlets and gardening contractors. There are now franchises for mentoring managers and sportspeople and franchises for internet shopping. In the future the Dubai economy will more likely be filled by innovative and creative franchises which seek to capitalize on their market lead and intellectual property advantage. Franchises fill a market need and therefore, are the fastest growing way of doing business. The 1980’s and 1990’s brought radical changes to the employment market and the way people work. The oil-shocks and stock market corrections, the opening up of the world economy, reduction in subsidies, government deregulation and downsizing thrust into the job market capable, energetic and resourceful people who work on their own. Franchisees are people who have been employed in the past by someone else and a franchise opportunity is seen as a more relaxed way of making the transition from working for an employer to being self-employed. The risk factor of a proven business is also seen as a better option than breaking totally new ground. Thus, franchises are taken up by people prepared to invest in themselves, their personality and their skills who look for freedom and the rewards of hard work. Franchises are a personal investment, in the equity invested in the business, in the time and energy required to achieve success. Therefore, it is important to take a few commonsense precautions when selecting a franchise.
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1.1 What Is Franchising Franchising has picked up pace in Dubai with lots of international and national brands recognizing the significance of the model. Franchising is when a business realizes that its products or services and brand have created value that other investors want to replicate its proven concept. In order to benefit from its brand reputation and achieve scalability, the business owner becomes a franchisor. In the franchise model, the franchisor sells the rights to its business model to a franchisee. The franchisor receives up-front fees from the franchisee for granting business rights and using its logo. The initial fee also includes training and equipment support. Additionally, the franchise company also receives royalty fees from its franchisee(s) from time to time as agreed upon by both parties. 1.2 Elements of Franchising Franchisors seek expansion into new markets and deliberate different strategic options and plan the franchise model structure. The franchisor needs to follow some rules pertinent to franchising while launching and running its franchise business. These considerations help not only the franchisor but also its franchisees to create an effective franchise system and goodwill between both of them. The franchisor should carefully draft the franchise contract and operations manual. The agreement serves as a foundation for both the parties to the franchise contract to impart an understanding of the terms of starting and running the franchise. It clears the rights and duties of the franchisor and the franchisee. The franchise agreement should be prepared by experienced legal franchise expertise. The franchisor needs to draft an operations manual for the franchisee that specifies the manner in which the franchise is to be operated. The franchisor should also take steps to protect its intellectual property (IP) comprising its logos, trade-marks, business process against potential misuse by its franchise partner. The franchisor requires successful management of its brand portfolio, to represent, communicate and safeguard the key brand fundamentals. Finally, as franchises are volume driven in terms of number of stores, units or locations, so, it is essential that a franchisor has a flair for diverse franchisees to rung a successful franchise distribution channel.
1.3 Traits of Franchisors Franchisors are typically business owners and entrepreneurs who have a broader vision and foresight. Franchising entails big brands and a vast market to be captured by quick expansion and scalability. The franchise growth model is an aggressive and rigorous model. The franchisor would require traits like effective management, operational skills, training and mentoring system, sales drive, people skills and marketing to be successful. Also, uniqueness, innovation, persistence, adaptability and commitment are important for franchise success. 1.4 The Franchise Scenario and Context in Dubai The franchise market is dominated by American brands and French brands mostly in sectors such as fast-food and fashion retail. The scenario has started changing now and the opportunities are available in diverse sectors of the economy and many Asian franchisors are entering the market. Until now, the Dubai franchise market has witnessed supremacy of few big 4
retail conglomerates having multi brands in their portfolio and pre-dominantly the Master Franchisee arrangements but now the trend for small franchisees and sub-franchising is picking up. In the absence of specific franchise legislation, general contract and commercial law is applicable to franchise agreements in Dubai. Also, the principles of Sharia law apply to commercial transactions in the Emirate. As per the UAE law, only UAE nationals or corporations wholly owned by UAE nationals or those with a UAE partner or sponsor are permitted to carry out operations. Therefore, due diligence on part of franchisor for prevailing laws and also while selecting the local partner or sponsor. Furthermore, the franchise agreement needs to be registered before a Dubai court. Currently, franchises are operating in fast foods, dine-in restaurants, auto leasing, apparel, soft drink bottling, beauty products, hotels, toys, photography, jewelry, vending machines, dry cleaning, furniture, hardware stores, office supplies, natural health products, publications, quick printing, garden care and florists, sporting goods, retail/convenience stores, maid and personal services. Today, the largest segment in this industry is fast food with most major US fast food companies are already established in Dubai. Franchising Middle East (FME), is the largest international franchise exhibition in the Middle East, supported by the IFA (International Franchise Association) is conducted annually in Dubai and facilitates direct communication between entrepreneurs and potential franchise buyers from the region and beyond. The show has earned an enviable reputation of being the ideal networking opportunity for international franchisers, to access the thriving Middle East and North African (MENA) markets, and launch their franchise concepts More than 70 brands from 25 countries attended the expo in 2010, which was organized by International Expo Consults, and due to the large turnout of prospective investors and positive feedback from exhibitors, it is expected that many regional brands will soon be launched into international markets.
1.5 The Advantages and Benefits of Franchising The major advantage of a franchise is the freedom of self-employment. This freedom is tempered with the knowledge that the owner has invested in a proven system and has the training, support and encouragement of the franchisor and other franchisees. Owning a franchise provides a semi-monopoly environment in which to conduct business in a particular area. Typically, there is an informed ready-made customer base. There will be competitors but the franchisee will be granted a sole franchise for a given area and be provided client listings or job sheets. Most importantly, being part of a franchise ensures the franchisee is part of an instantly recognizable brand, the product or service expectations that a brand brings, and the reputation gained by the brand over time. A franchise offers the franchisee the ability to capitalize on the know-how and systems that prove to be successful. Some of the advantages a franchise offers are the: 5
Freedom of employment Proven product or service outcomes Semi-monopoly due to defined territory / geographical boundaries Proven brand, trade mark, recognition Shared marketing, advertising, business launch campaign costs Industry know-how Reduced risk of failure Access to proprietary products or services Bulk buying advantages On-going research and development
The franchisor has many benefits for adopting the franchising route. He/she is capable to utilize the franchisee’s assets like funds, time, faculties, links, ideas, and resources of others to expand, increase collective buying power, R&D of new products and services. A franchise can sell its business without giving away its ownership. Franchising generates instant cash flow and requires no supplementary real property or equipment and it has no liability for daily operations and management and other emergencies. Also, the franchisor has a long term residual income stream at his/her disposal. The income of the franchisor is calculated on the basis of the gross sales of the franchisee and not profitability. The franchisee is liable for the profit and loss of the business. Dubai has a pro-business environment , whose investor-friendly policies attest to if one considers its infrastructure, corporate taxes, transfer of profits to home countries, entity ownership and availability of large pool of human resources. Businesses located in the multiple free zones enjoy tax exemption. The franchise sector in Dubai gets generous support from the government. The state is promoting the franchise sector to induce growth and development of the small and medium size businesses. Government backed Mohammed Bin Rashid Establishment for Young Business Leaders provides business training to entrepreneurs and also encourages women entrepreneurs. Further, the government established the UAE Franchise Association in 2004. The Dubai Islamic Bank (DIB) has a program for aid of young UAE citizens under which it extends to them for buying franchise business.
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2. What Makes a Good Franchise? Franchising is applied to just about any economic endeavor. Franchising encompasses products and services from the manufacture, supply for manufacture, processing, distribution and sale of goods, to the rendering of services, the marketing of those services, their distribution and sale. Franchises are business arrangements which allow for the reputation, goodwill, innovation, technical know-how and expertise of an innovative franchisor to be combined with the energy, industry and investment of the franchisee to conduct business. Therefore, franchises are an effective way of combining the strengths, skills and needs of both the franchisor and the franchisee. Successful franchises are the result of innovation, initiative, investment and industry. Successful franchises should identify their critical success factors, and from these, their key performance indicators (KPIs), not only for the franchise as a whole, but for each franchisee. It is crucial to understand what is the fault of the franchisee, and what the franchisor controls. For example, one of a franchise’s critical success factors is customer service. Standards could include:
The greeting A clean uniform and name tag Courtesy and willingness to help A pleasant character and poise Public areas and their design Service efficiency
A good franchise develops from a good idea which fills a market need. A good idea is reinforced by initiative and is driven by their creator who tries to make the idea work. You can develop a franchise system for repeating tested success by establishing, developing, updating and monitoring the required investment of time, money and innovation that ensures that the target clients’ expectations are met, anticipated and managed. Hence, your innovation results in a unique, memorable and exclusive name which establishes a unique selling proposal and brand. The benefits of franchising accrue to both franchisors and franchisees. The franchisor controls although he/she does not control the day to day management of the franchisee’s location. The franchisor sets brand standards for products and services, handles the consumer brand management and promise. Additionally, franchisors market and transfer the unit investment and operating costs to the franchisee, therefore, accelerating expansion. In a franchise there are no contingent liabilities on expansion capital, on real estate and no equity dilution. Market penetration is one of the benefits for franchisors because of the increased brand recognition as more locations open. Franchising permits the penetration of smaller markets, and accelerates the market dominance over local competitors. Franchises improve location availability from 7
landlords. Furthermore, as the system expands, the value of the brand at the franchisor and franchisee level increases. As a franchisor, you have have collective buying power that reduces the costs of products, equipment because of your system’s purchasing capacity and the sharing of resources such as warehouses, production, and distribution. As a franchisee, you would manage the day to day activities of your local business to system standards, and take a long-term view of customer service. You, as a franchisee have the benefit of taking up a tested system of operations, and brand standard product and services. Furthermore, you are provided with site selection and development assistance through training. Equally important are your gains from reduced start-up costs, and costs of goods, and marketing assistance. Every business can be franchised but if you are a franchisor, you should have operated profitably the business being franchised. The business should be able to define criteria for locations; location layout in terms of interior and exterior décor/design and signage; construction and development costs; seasonality and competition; brand personality; marketing; pricing strategy; operating costs; training; and supply chain. One sector of franchising that’s always competitive is food; think of all the burger, pizza, and frozen yogurt places that dot the landscape within a certain radius of your home. If you’re leaning towards a food franchise, make sure that the franchise you choose has a unique selling proposition.
2.1 The Franchise Relationship The franchise relationship is based on a contract between a franchisor and a franchisee. The franchise relationship is detailed in your franchise disclosure document, agreements other licenses and the operating manuals. There is no fiduciary relationship between a franchisor and franchisee. However, they work closely and are interdependent partners with their roles defined. 2.2 Types of Franchises There are two types of franchises. First, is a product distribution franchising. The second, is a business format franchising. In a product distribution franchising, products are usually made by the franchisor for sale by a franchisee. In this case, products require some preparation and postsale service. In product distribution franchising there is a strong identification with your brand. For example, products that are typically franchised are soft drinks, automobiles. Business format franchising is identified by a system of delivery which is more important in the product distribution franchise. This is more prevalent in the restaurant, hospitality and leisure businesses.
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2.3 Ownership Structures Used in Franchising Single Unit Franchisee Developer/Multi-Unit Franchisee A Single Unit Franchise is characterized by one location owned and operated by you as a single franchisee under a single unit agreement. A single unit franchise is supervised by the franchisee. A Developer/Multi-Unit Franchisee is characterized by its many advantages such as lower cost of acquisition per location; better controlled growth in markets; fewer franchisees to work with; franchisees are more sophisticated with a stronger financial condition; can reduce cost to support each location. In this ownership structure, multiple locations are owned by one franchisee, with each location having a single unit agreement. The developer has the right and the obligation to develop locations that is, a fixed number of units, a set time for development and a well-defined area.
2.4 How Franchises Work In a basic franchising arrangement if you act in the capacity of a franchisor, you develop a system for conducting business. The system is successful. The franchisor emulates the success of that business system, usually in a different geographic area, and establishes a blueprint for franchisees who wish to emulate the success to operate the same business using the same name and same systems. 2.5 Franchise Arrangement The franchise arrangement is an arrangement whereby as a franchisor you license the franchisee, in exchange for a fee, to exploit the system developed by you if acting in the capacity of a franchisor. The franchised system is generally a package including the intellectual property rights, such as: The rights to use the trade mark Trade-names, logos, and competitive advantage and goodwill associated with the business Any inventions such as patents or designs, trade-secrets Know-how of the business and any relevant prospectuses Advertising Copy-righted works relating to the manufacture, sale of goods or the provision of services to customers It is recommended that you watch out for your intellectual property which is unique to your business and provides your business with its competitive advantage and market niche.
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3. A Typical Franchise System A typical franchise system will generally include:
A license to use the system - In return for an agreed amount, the franchisee is granted a license to conduct his or her business along the lines prescribed by the franchisor. This will usually include the use of all relevant intellectual property, marketing and advertising publications, store design and “get-up”, as well special equipment necessary to operate the systems and on-going or development and improvements to the system. A shared development and improvement obligation - Most franchising arrangements have an on-going shared development and improvement. This obligation applies to both the franchisor and franchisee. This requires a mutual trust and respect and a sharing of the overall aims and goals of the franchise. The basic tenant for this approach is that what is good for one must be good for the other. The franchisor is also obligated in the arrangement to nurture, encourage and provide assistance to the franchisee. The franchisee for their part is required to maintain and promote the franchise and to conduct business prescribed in the system manuals and best practice guidelines. The franchisee also has the continuing obligation to pay maintenance fees to the franchisor in accordance with the franchise arrangement. These fees usually include an advertising / marketing component as well as an on-going management service fee. The franchisor’s right to determine how the business operates - Most Franchise arrangements contain a component which stipulates that the franchisee conducts the business along prescribed guidelines and in accordance with the franchise’s best operating practice. The franchisor is required to maintain, distribute and update the manuals, operating procedures and quality requirements when changes are made and to provide on-going training. The franchise arrangement will require the franchisee to protect the intellectual property of the franchise system, and to operate in accordance with territorial or geographical obligations agreed. Both parties will be required to conform to the agreed accounting disclosure provisions. The franchising arrangement is a legal document that relies on contract law and mutual trust between franchisor and franchisee.
3.2 Licensing There is no standard license. Every arrangement is unique and has its own special requirements, aims and objectives. All licenses should be read and evaluated by a licensing professional before being signed. 10
Needless to say, every license should be clear to all parties concerned. The individual parties should be aware of the obligations that the contract places on them, the conditions that have to be met and the time lines by which specific functions are to be performed. All of these features should be transparent and measurable. Each party should also be acutely aware of the other parties’ responsibilities. Territorial or geographical boundaries should be made clear, as should all payment obligations and the amounts that are to be paid (and how they are calculated). All payment, dates should be clearly laid out, preferably in a schedule. Penalties, such as default payments, breach of contract conditions, rights to assign, the term of the contract, and the right to renew, are considerations that are not well understood and often overlooked. Bonus conditions could be negotiated and should not be dismissed in a licensing agreement There are, though certain features that should be considered in the development of every license. The following is a list of what you should consider: Is the license exclusive, granted to only one person, or non-exclusive? Can you as a licensed franchisee sub-license? Are there limitations to your license such as geographic or territorial, minimum sales, and/or minimum production requirement? What is the amount, frequency, and form of payment, in lump sum or by royalty, or a payment schedule? Who pays for prosecution and maintenance of any IP (patents, trade- marks, designs)? How are any developments, modifications or improvements to be protected and who owns them? Who is responsible for filing for further improvement patents overseas? In whose name will the applications be made in? What is the term of license? Is there a right to renew? What are the conditions of termination? When are royalty or other payments due? If sub-licensing is permitted what payment does the licensor receive? What information is the licensee committed to providing to the licensor? What happens if the IP under which the license is granted is refused, infringed, opposed, revoked or other? Is copyright a consideration? Does the licensee agree not to challenge the validity of the patent? Does the licensor agree to provide essential “know-how”? What provisions for any “hardware”, should the license be terminated? How will any disputes be resolved? What happens in the event of death of one of the parties?
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3.2 The Difference between a Distribution, License and Franchise Agreement Distribution agreements, licenses and franchise agreements are all legal vehicles which allow business to be conducted efficiently and the business interests of both parties to be identified and protected. The agreements lay a platform for the success of the business arrangement and should be reviewed at a regular basis. No agreement should be entered into without seeking the advice of an IP professional or franchising lawyer. 3.5 Distribution Agreement The majority of distributorships are non-exclusive. As a consequence a franchise can offer significant advantages in terms of market presence dominance. A distribution agreement is a contract between a manufacturer, producer or importer and the seller or distributor. The distributor may be an exclusive agent selling only those goods belonging to the producer or, an exclusive agent of a particular producer’s goods in the market. And exclusive distributorship may allow the distributor to grant sub-distribution licenses. 3.5 License Agreement A license arrangement is a business arrangement where a licensor by a patent, a trade mark, a design or a copyright has exclusive rights which prevent the exploitation of the idea, design, name or logo commercially. The license allows the licensee to use make and sell, the product or name for a fee without censure. In a trade mark license, for example, the licensee will be granted full privilege to use the trade mark on goods or services provided that the use is in accordance with agreed signage protocols and quality guidelines. There is usually no training component, product development strategy and limited marketing support. 3.5 Franchise Agreement A franchise arrangement is a more robust arrangement for new entrants into a line of business. The franchise agreement covers obligations on both parties and includes a training, mentoring and technical advice component for the franchisee. A franchise agreement is a specialized license and will cover all aspects of IP, user obligations and use provisions. 3.6 Things to be Aware of When Selecting a Franchise Franchising is business. It is the buying and selling of goods and services and, like every business transaction, requires careful thought before the transaction action is completed. Buying a franchise is the same as buying into any business. Balance sheets need to be looked at and bottom lines investigated. The franchise should also be compared with similar franchises in similar areas so that apples are compared with apples and expectations and incomes are realistically assessed. An overlooked aspect of franchising is intellectual property owned by the franchisor or not owned by him/her.
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An essential factor of a franchise is its name. This is how franchises products and services are brought, sold and marketed. It is how its customers know the business. Particularly when entering into a new franchise system, or into a new area it is imperative that the monopoly position encompassed in the name of the franchise is thoroughly examined. The brand and the exclusivity that it brings to a business will form a large part of the purchase price of the franchise and is one of the most attractive parameter to potential customers. A name-brand availability search is therefore essential and should be performed by a professional search service. Patent ownership, copyright and marketing should be investigated and the right to use should be determined. Most franchisees have an alacrity for their products and the business they are in, so it is important that when you select a franchise that it is chosen with an eye to the bottom line now and in the future. A franchise also should not be selected because the bottom line looks good alone, because bottom lines and profit can easily evaporate if there is no passion for the product, the business or a commitment to the customer.
3.7 The Franchisor – Starting a Franchise Chain Franchising is a knowledge industry. The franchisor has as a result of innovation, intensive system development and product refinement gained market acceptance and customer loyalty. The franchisor in order to exploit his market position, shares his knowledge with the franchisee. The platform on which the franchise is built for gain is its intellectual property. The franchisor in order to successfully impart knowledge and to assist franchisees to run successful businesses using his/her methods will communicate the methods by basic operating procedures manual, quality assurance manuals and training manuals. The best franchises have the most comprehensive work manuals and programs.
3.8 Goodwill Goodwill is the benefit and advantage of the good name, reputation and correction of a business with its customers, suppliers, and distributors. Goodwill is the name sign or trademarks under which a business trades and by which it is recognized in the market place. In franchising, a franchisor by building a successful brand through marketing, good practice and innovation creates goodwill which is utilized by the franchisees to further give the goodwill and add value to the business. Goodwill therefore is an important component when valuing a business and should be evaluated and protected. Goodwill can be easily defined and protected by gaining registered trade-marks for the trading name of the franchise. Goodwill may also be protected by asserting copyright to manuals, advertising and marketing brochures, recipes, management and accounting software and even the design and layout of facility premises.
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4. How to Open a New Franchise in Dubai There is no special legislation for franchising in the UAE. General contract and commercial law apply to franchise agreements. UAE law mandates that only UAE citizens or corporations wholly owned by UAE citizens or those with a UAE partner or sponsor are allowed to conduct operations. Businesses located in the multiple free zones are exempt. However, Dubai has strict regulations regarding new business registrations. Franchising combines the entrepreneurial passion of a small businessman with the experience and resources of a larger corporation. This organizational structure is extremely efficient and offers you maximum benefits in addition to support from the franchisor. In order to start a franchise, you need to possess a business mind with an optimistic, confident and passionate attitude. Dubai offers a friendly business environment in its terms of corporate taxation, repatriation of profits, infrastructure, entity ownership and human resources.
List your interests and skills and identify the service industry you wish to enter. Make a list of the available franchising opportunities by browsing through local advertisements and inquiring among your neighbors, friends and relatives. Research the list of franchisors based on various factors such as brand image, customer preferences and quality of service. Narrow down the list to a few entities and contact them in person or mail them expressing your interest in the franchising opportunity. Verify the rules and legislation to open a franchise in Dubai. You will need to be a Dubai citizen, corporation wholly owned by Dubai citizens or individual with a partner or sponsor to open a franchise and conduct operations in Dubai, according to United Arab Emirates (UAE) law. The sponsor or partner must be a UAE national. This law does not apply to a business if you open one in any of the multiple free zones of Dubai; however, you will need a much larger capital base to open in a free zone. You will need to have good contacts and influence to start and run a franchise in Dubai and a sponsor will be very useful. Sign with one of the franchisors that best suits your requirements. Draw a contract and sign the agreement. Consult a lawyer before you submit the agreement to discuss potential bad terms within the contract. Write a business plan that includes your business overview, competitor review, market trend in the particular service, your core competency, your financial projections, marketing and distribution plans and your funding alternatives. Include the contracts or legal documents from your franchisor. You can approach a UAE franchising association, Dubai Islamic Bank or Mohammed Bin Rashid Establishment for Young Business Leaders for funding sources. Register your franchise agreement before a UAE court. This is mandatory. Register your business and obtain the trade license. You may need the help of your sponsor in these activities, because of the strict registration rules in Dubai.
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Choose a suitable location based on your target market and comply with local zoning regulations. Open your franchise. Market your business through the franchisor, who will likely offer advertisement support for new and existing franchises.
In Franchise UAE 2011 Farid Karmostaji, Director of Entrepreneur Development Division of Dubai SME, indicated franchising is one of the most successful ways to start business since the franchisor can reach new markets at minimal costs, while the franchisee can benefit from the strengths of an established brand, training and knowhow. According to Gaurav Marya, Managing Director, Franchise Middle East, there has been a rise in interest in franchising in the UAE and the region and many UAE brands are ready to go global. Therefore, the franchise model is a popular method for overseas companies to enter the Dubai market while retaining control over their brand. It is also popular with UAE businesses seeking to expand domestically and regionally.
There is no one specific franchise law in Dubai. The concept of franchising falls within the ambit of commercial and agency laws which do not differentiate between franchise, agency or distribution agreements. The Agency Law tends to favor agents/franchisees rather than franchisors. Registration of agreements with the Ministry of Economy can provide an enhanced ability to prevent parallel trading of goods and a clear evidential basis upon which to proceed with any actions for trade mark infringement, however termination of a registered agency agreement can be difficult.
4.1 What franchising laws are in place in Dubai? Franchising refers to the business model whereby the franchisor grants an independent operator the right to use the franchisor’s business methods and practices and can include the right to distribute products manufactured by the franchisor, use the franchisor’s trade-marks and obtain training and other support such as international and national advertising. Such agreements are often for a long period with early termination by either party usually incurring serious penalties. Although there is no one specific franchising law in Dubai, a range of civil and commercial laws apply depending on the terms of the contract. There are multiple laws which can apply to franchising relationships and these include:
Federal Law No. 18 of 1981 on the Organization of Commercial Agencies (as amended by Law No. 14 of 1998) and which was further amended by Law No. 13 of 2006. Federal Law No. 5 of 1985 on Civil Transactions. Federal Law No. 18 of 1993 on Commercial Transactions.
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In addition to the above depending on the terms and conditions of the agreement other laws and regulations may also be relevant, including:
UAE intellectual property laws for trade-marks, copyright and patents. Labor laws, especially, where a franchisor may second staff to the franchisee. Local Municipality rules - in relation to business names and signage; UAE general principles dealing with restraint of trade and assignment of the franchise back to the franchisor in the event of default.
According to the Agency Law, a Commercial Agency is defined as a representation of a Principal by an Agent on the distribution, sale offer or presentation of commodity or service within the Emirate. In order for the Agency Law to apply, the: Agent must be a UAE national or a company wholly owned by UAE nationals; Relationship must be exclusive; and Relationship between the agent and principal must be registered with the UAE Ministry of Economy. The Agency Law favors agents/franchisees rather than franchisors and therefore in the context of international brands looking to expand into the UAE market, consideration needs to be given to whether it is appropriate to have the agreement registered with the UAE Ministry of Economy. For franchisees often the decision often depends solely on whether they are UAE nationals or their company is wholly owned by a UAE national. For both franchisors and franchisees, registration can provide an enhanced ability to prevent parallel trading of goods and a clear evidential basis upon which to proceed with any actions for trade mark infringement. In the case of franchisors however, termination of a registered agency agreement is usually difficult. Substantial compensation could be awarded to the agent upon termination and the agent is entitled to commissions from sales made by others in their territory. When the agency agreement is registered, it is difficult for principles to appoint a replacement agent in the event of termination or failure to renew the agreement.
4.2 International Franchising Franchised businesses continue to grow all over the world. Domestic franchisors in Dubai are increasingly establishing franchises across borders. International franchising is successful because consumers around the world recognize famous brands as symbols of quality, consistency, service, and value. If you are considering the purchase of a franchise, you may want to not limit the scope of your search to franchisors in your home country. Increasingly, franchisors are seeking franchisees internationally, and a foreign-based franchisor may provide you with the franchised opportunity you are seeking.
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In many cases, foreign-based franchisors offer individual franchises to operate a single unit. They also often offer development rights to operate multiple units and master franchise rights. A master franchise allows you, essentially, the opportunity to be the franchisor for the foreign-based concept in your country or a portion of your country. International franchising presents different challenges than domestic franchising. For example, if goods will come from overseas, you may need to be aware of various duties, tariffs, and transportation requirements. You also need to consider language and cultural differences. For instance, if you are a franchisee in a different country from the franchisor’s home office, the franchisor’s system may need to be modified for use in your country.
4.3 Minorities and Women in Franchising Increasing numbers of minorities and women are discovering that franchising can be a good opportunity for everybody. Franchising provides a means for mitigating the traditional obstacles that otherwise competent and capable small investors, particularly women and minorities, face, such as, lack of business experience and capital. Franchisors provide managerial training and assistance on an on-going basis and, in some cases, arrange for property leases, provide equipment financing and saleleaseback programs, and assist franchisees in obtaining financing. As a result of a strong economy, women are increasingly in leadership positions in franchising whether through establishing new companies, becoming single and multiunit franchisees, or having high-level positions at corporate headquarters.
4.4 Technology and Franchising There are several trends related to the use of technology in franchising. First, many franchisors use the internet to communicate with franchise owners and suppliers through secure extranets in order to share critical information, facilitate discussion among the franchise network, post operations manuals and updates, disseminate news about ad campaigns, engage in supply chain management, and gather sales reports automatically and without the need for more laborintensive data entry. Second, franchisors use the internet to advertise their network to customers. Third, some franchisors use the internet to engage in business-to-consumer (B2C) ecommerce, often with the involvement of franchisees. Fourth, many prospective franchisees glean information and make contact with franchisors using the internet. Some franchisors now report that they get more sales leads from the internet than from any other source. Fifth, some franchisors have started providing disclosures to prospective franchisees by electronic means. Sixth, franchisors make extensive use of technology in offering their services directly to consumers such as networks of businesses that offer website design and web hosting. Dubai was listed as a top area for Asian retailers targeting outside markets second only to London according to a recent report titled “How Global is the Business of Retail” by CB Richard Ellis. Brands from Asia, and more specifically India, have a huge potential for franchising opportunities in the UAE due to their large demographic mix and bright economic future. 17
The Middle East region’s multi-ethnic population with high disposable income lends to an environment that’s ready for new business ventures and budding enterprises. More importantly, the region boasts over 400,000 high net worth individuals who have more than $2 trillion together to invest in new businesses. The regional economy of the Gulf countries is entering a new stage with the small and medium enterprises and the franchise sector playing a crucial role in the economy. and offer one of the biggest sources of new business opportunities and employment Franchise contributes to the growth and development of the economy and There is While fast Franchise Selection assists in matchmaking international franchise concepts with interested entrepreneurs and investors Middle East- An international center of business and trade
The total population of the Middle East and North Africa is 297 Million. The region's population growth rate is 3%-5% per year, which is one of the highest regional rates in the world The SMEs and franchise sectors are one of the fastest growing economic sectors UAE's franchise business is worth over AED 1.1 billion International companies are showing keen interest in Dubai and, with the US economy being stagnated; the local market is grabbing the opportunities. Fast food accounts for 40 per cent of the total market, other sectors are also growing rapidly. Industry estimates put the annual growth of this sector at 27 per cent Franchising in the Middle East is on the threshold of remarkable growth. A tremendous response from investors in the region as franchising is an important source of new business opportunities.
4.5 Dubai, GCC & MENA Franchises Dubai remains the preferred base for franchised operations in the region, given its tax status, the comparative stability of its legal and regulatory systems and it openness to foreign investment, though Most countries in the Middle East region do not have franchise- specific legislation The franchisee market is dominated by a small number of players who take multiple Brands franchise known as Franchise Conglomerates ,with some having as many as 5055 brands in their portfolio To be a franchise you need a proven successful business, with distinctive brand, system, name and appearance: A business, which can be easily duplicated in other locations to create a manageable and profitable network Been running at least two outlets for a reasonable length of time A business which can be easily learned in a reasonable period of time by someone with the required knowledge, skills and interest to fit the desired franchisee profile 18
An on-going income from marketing and management service fees Increase the value of the brand and the mother company
These are just the general benefits of franchising. Each franchising project is different and there are many other benefits that apply to each different case. Middle East's strategic location has a key role in expanding any business around the world. Franchisors seeking new markets favor the Middle East as a franchising destination as it assures easy accessibility and communication with the surrounding areas. The most moderate estimate of the franchise industry in the Middle East and North Africa put it at $ 30 billion today. It also puts the annual growth of Middle East franchising sector at 27 per cent. This frantic pace provides huge opportunities for franchisors to bring their brands to the region, as this trend is set to continue for years to come, powered by massive consumption appetite, economic growth and record oil prices. Ensure the timing is right for the business to enter the international arena. In the last decade many Middle Eastern businesses proved to be very successful in the rest of the world with their efficient style, cost management and competitive distinguished products, especially in the retail, food and catering sectors.
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5. What to Consider in Evaluating a Franchise When evaluating a franchise opportunity, prospective franchisees must consider important legal and commercial factors before signing on. You should involve your lawyer at the early stages of negotiations so that he/she can work with you to protect your interests and help to get you the most out of your investment. There are many issues that should be considered depending on the chosen franchise system or business model and sometimes the industry in which you wish to operate. It is recommended that you consider the following:
Franchisor and system - Who is the franchisor? How well known are they? How is their system unique? How successful is the brand in other countries? Is this an established franchise system or are you the first franchisee? Territory - Are you being given a specific area (e.g. UAE) or just the right to open a store in one particular location (e.g. a store within a shopping mall). Are you obliged to open a certain number of businesses within a certain timeframe (i.e. five stores in five years)? Exclusivity - Are you being granted the exclusive right to use the brand in the territory? Is exclusivity against third parties or does it also include the franchisor? Term - How long is the franchisor willing to “license” the use of the brand to you? Are there any renewal/option periods to extend the term? If so, are there any conditions on exercising the option to renew the term? Fees - What fees are you required to pay. There is usually a one-off initial fee and ongoing franchise fees which can either be a set amount per period (monthly/quarterly/annually) or a percentage of your revenues or profits. If it is a percentage of revenues/profits, consider if there are any minimum or maximum amounts. There can also be many other fees including marketing fees, training fees, pre-opening assistance fees, and royalty fees. These fees need to be factored into your operating budgets.
Franchisor’s obligations - Consider what exactly the franchisor is giving you in return for the amount(s) you will pay. Will the franchisor attend to marketing for the whole brand that benefits your business or is it up to you to do local marketing? What systems, manuals and training will you be receiving? Make sure that every deliverable the franchisor has promised you is contained in your franchise agreement.
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Your obligations - What minimum standards do you have to keep? Do you have to purchase products only from the franchisor? Do you have minimum financial targets, staffing levels, marketing obligations? If you are selling products manufactured by the franchisor, do you have to give refunds, fulfill warranties or service requests or does the franchisor do this? What are your confidentiality obligations for the systems, manuals, policies and procedures the franchisors license to you? Intellectual property (IP) - What IP is the franchisor licensing to you? How has the franchisor protected its IP from third parties using it i.e. is there a registered trade mark and if so what “classes” of products are protected? Premises - If you rent premises, it is very important your lease term runs alongside your franchise agreement. For example, it is not ideal to have a 10 year franchise agreement but only a five year lease as the landlord may elect not to renew the lease, and you will have to spend further funds refurbishing a new premises. Your lawyer can work with you here to ensure both agreements run parallel. Termination - What will happen if the business is not successful? Is the franchisor currently involved in any disputes with franchisees or other third parties? Does the franchisor have any rights to take back the franchised business? If there is a dispute with the franchisor, what dispute resolution procedures are to be followed? If the agreement is terminated due to the franchisor’s breach, do you get part of your initial investment back? What is the governing law of disputes and where will disputes be heard?
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5.1 Successful Franchises in Dubai There are many successful franchises in Dubai of which prominent examples include:
Heritage for Henna - Beauty Franchise - Heritage for Henna started in Jumeirah Beach Hotel, Dubai. It was a huge success with foreign visitors and confirmed its owner’s belief that henna decoration has a massive market outside of this region. To maintain quality, Heritage for Henna sets up its own farms in carefully selected regions, where top quality henna shrubs are cultivated. In addition, considerable investment is made to select and train the most talented henna artists. Heritage for Henna provides a wide variety of drawings with traditional, classical, contemporary and modern designs. Unlike other projects that required large space and high rent, setting up a henna salon required only the minimum of 4 square meters.
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Heritage for Henna provides its franchise partners with a full range of support services that will enable them to manage their projects with a high level of efficiency and profitability. Furthermore, it offers assistance with the location selection, rental negotiations and installation of decor. At the same time, staff will be selected and trained to ensure that they meet "Heritage for Henna's" high creative and professional standards.
Foot Solutions Health & Wellness Franchise - This franchise provides foot care solutions and use high-tech computer foot scanning equipment to produce a complete line of custom shoe inserts and orthotics.
Malridge Master Distributor - Photographic Engraving Franchise - Malridge has developed a unique process for the customized engraving of photographs and graphics on glass surface, while, producing the highest finish and definition. They do photo engraving and personalized engraving on all types of glassware, from crystal awards and trophies to tableware.
Apart from the regulars like McDonalds, Burger King and KFC, the 3 biggest growing franchise brands internationally, there are many new casual dining, fast food franchising ventures which seem to be showing interest in the Dubai market. Egypt's Integrated Food Franchising is promoting its Pizza Conez product, a revolutionary new take on take away. The product is a pizza cone similar to an ice cream cone and it takes five minutes to prepare. The unique selling proposition of this product is that it is portable and has mobility. The fast food products from the US, for example, Pizza Hut and Dominoes have entered the Dubai market but Pizza Conez brand is about authentic Italian ingredients.
London Dairy - Is another food brand looking to increase its presence in the market. London Dairy is a complete Dessert Destination that offers the entire exclusive range of London Dairy Premium Ice Creams, dessert sundaes, pastries, cakes and single origin coffee. Subway - Subway franchise business is pushing the fast food market to continue the globalization of its company, and there are no plans on stopping in Dubai, with multiple stores opening in Kuwait, Saudi Arabia, and Qatar. There are 60 franchises already present throughout Dubai, and this means tough competition for prospective franchisees in Dubai.
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Conclusion Emerging markets are increasingly more important as opportunities for retail franchising in the West diminish because of market saturation and increased competition. Industries in which franchising is mature, offer fewer profits. For example, fast food, retailing, hotels and other service based industries. Emerging markets are unsaturated, poised for growth and there is increased demand for products and services that embody international standards and quality. Franchises allow local entrepreneurs to own and operate outlets of multinational companies that offer name brand awareness and recognition. The guide has tried to capture some issues relevant to franchising. Franchising considers not only organizational factors of industries and businesses but also environmental factors, firm decisions as to modes of entry and market selection, and operations. Franchises have macro impacts in terms of job creation, modernization, economic clusters, entrepreneurship and innovation. Before buying into a franchise consider:
the type of experience required in the franchised business a complete understanding of the business the hours and personal commitment necessary to run the business who the franchisor is, what its track record has been, and the business experience of its officers and directors how other franchisees in the same system are doing how much it's going to cost to get into the franchise how much you're going to pay for the continuing right to operate the business if there are any products or services you must buy from the franchisor and how and by whom they are supplied the terms and conditions under which the franchise relationship can be terminated or renewed, and how many franchisees have left the system during the past few years the financial condition of the franchisor and its system
Among the most important trends in franchising today are the internationalization of franchising, the emergence of women and minorities in franchising, and the increased use of technology. All of these have profound and positive effects on franchising and make it an even more dynamic method of doing business today.
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References Alon, Ilan. Welsh, Dianne, H.B. and falbe, Cecilia M. “Franchising in Emerging Markets”. In Franchising Globally: Innovation, Learning and Imitation. Palgrave Macmillan. U. K.: 2010. Pgs. 11-36. Ducket, Brian & Monaghan Paul. How to Franchise Your Business: Grow your Business by Creating and managing a Franchised Network. How to Books Ltd., Oxford , U.K.: 2011. Pgs. 5-27. http://www.franchise.ae/article/franchisor/franchise-strategy/Dynamics-of-franchising-for-UAEmarket-1/ www.franchise.org/uploadedFiles/Advertising/MSA.pdf http://www.ehow.com/how_7191460_open-new-franchise-dubai.html#ixzz1s6NfBaYS http://www.ehow.com/how_7191460_open-new-franchise-dubai.html#ixzz1s6NrsTJ8 http://www.franchiseuae.com http://www.hadefpartners.com/News/pageid/120-137/default.aspx?mediaid=71 http://www.franchise.org/franchiseesecondary.aspx?id=10008 http://thefranchisehound.com/2011/04/18/uae-and-middle-east-prime-locations-forfranchising-opportunities/ http://www.franchiseuae.com/franchising-middle-east.php http://www.mefranchising.com/Default.aspx wipo.int/edocs/mdocs/sme/.../wipo_smes_dub_10_inf_1_prov.pdf http://www.hadefpartners.com/News/pageid/120-137/default.aspx?Mediaid=96 http://www.hadefpartners.com/News/pageid/120-137/default.aspx?Mediaid=71 http://www.hadefpartners.com/News/pageid/120-137/default.aspx?Mediaid=208 (FME), F. M. July 2009 report Association, I. F. http://www.franchiseuae.com/pdf/Franchise-UAE-Brochure.pdf Exhibition, F. M. (2011). http://www.franchisingme.com/files/index.php http://www.franchiseek.com/UAE/. Franchise Opportunities in the UAE http://arabfranchise.blogspot.com/ http://uae.franchisesinternational.com/. http://www.emirates.org/. http://www.franchise.com/franchise-news/International_UAE_Dubai.cfm. http://www.uaeinteract.com/. LaSalle, J. L. Nov, 09 Report - Retail Sector UAE. http://www.dsg.ae/LinkClick.aspx?fileticket=KIYUb_RYXlA%3D&tabid=222. Modayil, J. (n.d.). Legal Talk. Free Spirit . Wikipedia. UAE Facts and Statistics. http://www.fai.co.in/pdf/Franchise_Business_Opportunities_for_UAE.pdf www.franchiseek.com/UAE/
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