Franchise Agreement in Saudi Arabia: What You Need to Know

A franchise agreement is a contract under which the owner of a successful brand and business model (the franchisor) grants another party (the franchisee) the right to operate a business under its name and according to its methods, in return for agreed fees or other consideration. In Saudi Arabia, this contract is governed by the Franchise Law and its implementing regulations, which impose specific obligations, most notably providing the prospective franchisee with a disclosure document before contracting.

What is the legal framework for franchising in Saudi Arabia?

The Franchise Law regulates the relationship between franchisor and franchisee and aims to ensure transparency and protect both parties. The Ministry of Commerce oversees its application, including the requirements for registering franchise agreements and disclosure documents in accordance with the procedures it sets. Because these detailed requirements, timeframes and procedures may be updated, it is always advisable to review the current text of the law and its regulations on the official laws platform and to check the procedures through the Ministry of Commerce's platforms before signing.

What is the disclosure document and why does it matter?

The disclosure document is provided by the franchisor to the prospective franchisee before the agreement is signed. It contains material information to help the franchisee make an informed decision, such as:

• The franchisor's details, experience and legal status.
• A description of the franchise, the associated trademarks and their registration status.
• All fees and other financial consideration, and the expected initial investment.
• The obligations of both parties, including training, support and supply.
• The restrictions placed on the franchisee, such as the geographic territory and purchasing sources.

Reading the disclosure document carefully and comparing it with the text of the agreement is one of the most important steps in protecting the franchisee.

What are the key clauses in a franchise agreement?

1. Subject of the franchise: the trademark, business model and know-how licensed for use.
2. Territory: is the right exclusive within a city or region? May the franchisor open company-owned branches there?
3. Term and renewal: the term of the agreement and the conditions for renewal.
4. Fees: the initial fee, ongoing royalties, joint marketing fees, and how they are calculated.
5. Training and support: what the franchisor provides at opening and during operation.
6. Operating and quality standards: the operations manual, and the franchisor's right to inspect and monitor.
7. Supply: must the franchisee buy from approved suppliers?
8. Confidentiality and non-competition: during the agreement and afterwards, subject to reasonable restrictions.
9. Assignment and sale: the franchisee's right to transfer the business to someone else, and the franchisor's consent.
10. Termination and its consequences: grounds for termination, ceasing use of the trademark, and what happens to the premises and stock.

Why is the trademark at the heart of a franchise?

The value of a franchise rests primarily on the trademark and its reputation. The franchisor should therefore make sure its mark is registered with the Saudi Authority for Intellectual Property (SAIP) in the appropriate classes of the Nice Classification before expanding, and that the agreement contains a clear licence to use it. The franchisee, for its part, should verify that the mark is registered and in force before investing. You can learn more about our trademark licensing and trademark registration services.

The agreement should also specify who owns any development or improvement the franchisee suggests to the product or the way the business operates, and what happens to the digital accounts and contact numbers associated with the outlet when the relationship ends.

Tips for franchisees before signing

• Do not rely on projected profit figures without verifying them and speaking to existing franchisees.
• Calculate the total cost: initial fees, fit-out, royalties and working capital.
• Make sure the territorial protection and its limits are clear.
• Review the termination and exit terms as carefully as the entry terms.

What does a franchisor need before expanding through franchising?

Not every successful business is ready to become a franchise. Before offering your brand as a franchise, make sure you have:

1. A proven business model: stable operating results at one or more outlets that can be replicated elsewhere.
2. A written operations manual: documenting standards, procedures, recipes and service methods, because this is the core of what you will pass on to the franchisee.
3. Intellectual property protection: registration of the trademark and logo in the appropriate classes, and protection of know-how through confidentiality.
4. A training and support programme: a genuine ability to train and follow up with franchisees.
5. Complete legal documents: a franchise agreement and disclosure document that comply with the law and its regulations.

Expanding quickly without these foundations can harm the brand itself, because any weak outlet reflects on the reputation of the whole network.

Frequently Asked Questions

Q: Can a franchise be granted for an unregistered trademark? A: Relying on an unregistered trademark exposes both parties to significant risks. Sound practice is for the trademark to be registered and protected before any franchise is granted.

Q: What is the difference between a franchise and a trademark licence? A: A trademark licence is usually limited to the right to use the mark, whereas a franchise covers an integrated business model including know-how, training, support and operating standards.

How can we help?

FATIMA AL ASMARI Law & Intellectual Property Company in Jeddah supports franchisors and franchisees across all regions of Saudi Arabia, from protecting the trademark to drafting and reviewing the franchise agreement. Book your consultation or call +966 56 685 9556.

Legal sources

This article is for general awareness and is not legal advice.