Franchising in Saudi Arabia is a fundamental tool for business growth and expansion, as well as for boosting the productivity of large and small businesses. It provides small and medium-sized enterprises with the chance to leverage successful business models within a legal and regulatory framework that protects the rights of both parties. Moreover, Franchising allows these entrepreneurs to capitalize on established trademarks, managerial expertise, and operational strategies of renowned local and international companies. Consequently, this approach not only strengthens competitive capabilities but also broadens the market presence of these brands, fostering a more dynamic business environment.

It is noted that the Kingdom of Saudi Arabia provides a supportive regulatory environment that protects the rights of Franchisor and Franchisee a point which will be examined in detail in this article. Through this framework, the sustainability of the franchise sector is enhanced, positioning franchising as a strategic choice for fostering economic growth and prosperity. Furthermore, Saudi Arabia cultivates a competitive business environment that not only stimulates local economic expansion but also generates new employment opportunities. As a result, franchising emerges as a fundamental tool in propelling economic development and advancing the nation’s broader growth objectives.

The Article Contents:

• What Does Franchise Mean in Saudi Arabia?
• What Are the Requirements for Franchise in Saudi Arabia?
• What Are the Franchise Fees in Saudi Arabia?
• What Are the Obligations of the Franchisor in Saudi Arabia?
• What Are the Franchisee’s Obligations in Saudi Arabia?
• How to Renew a Franchise Agreement in Saudi Arabia?
• How to Assign a Franchise Agreement in Saudi Arabia?
• What Are the Grounds for Termination or Expiration of a Franchise Agreement in Saudi Arabia?
• How to Claim Compensation in Franchise Projects?

What Does Franchise Mean in Saudi Arabia?

Franchise in Saudi Arabia is a commercial agreement between two parties, in which one party (the franchisor) grants another party (the franchisee) the right to use a brand, its identity, business model, service, or product in exchange for a financial fee or a percentage of profits. Furthermore, franchise in Saudi Arabia is not only an effective means of transferring expertise but also plays a significant role in enhancing opportunities for both local and foreign investment. In a different context, franchise in Saudi Arabia constitutes a contract concluded between two persons or entities. One party is referred to as the franchisor, while the other is designated as the franchisee. Under such a contract, the franchisor grants the franchisee the right to operate the business associated with the franchise for their own benefit, under the trademark or trade name owned by the franchisor or licensee. Moreover, this agreement includes the provision of technical expertise and franchisee's know-how, as well as the establishment of operational procedures for conducting the franchise business. In return for these rights and support, the franchisee provides a financial or non-financial consideration, although this does not include the amounts paid by the franchisee to the franchisor for the acquisition of goods or services.

Certain types of franchise agreements in Saudi Arabia shall be excluded, thereby these types are not subject to the provisions of the Saudi Franchise Law:

• A Franchise granted or issued pursuant to a Royal Decree.
• An agreement or contract subject to the Law of Commercial Agencies applicable in the Kingdom.
• An agreement or contract limited to the sale of goods or provision of services carrying certain
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  trademarks, or to the use of a trademark or any copyrighted material of any good or service.
• An arrangement whereby the franchisor fully owns the franchisee, whether directly or indirectly.
• The agreements entered into by the franchisor with the franchisee concerning the implementation of the franchise agreement include the following:
• The agreements or arrangements entered into between the landlord and the tenant, as well as those between the tenant and the subtenant.
• The agreements or arrangements entered into between partners or shareholders.
• The loan agreements or arrangements entered into between creditors and debtors.
• The agreements or arrangements entered into between the employer and the employee concerning their employment relation.
• The agreements or arrangements through which a non-profit entity purchases goods for its members, provides them with services, or assists them in purchasing goods or benefiting from services.
• Licenses or permits granted by a government authority.

What Are the Requirements for Franchise in Saudi Arabia?

In order to legally grant a franchise in Saudi Arabia, the following shall be considered:

1- Offering a franchise opportunity or granting a franchise in Saudi Arabia:

A franchise shall not be offered nor granted until the franchised business, as per the franchise business model, has been practiced for a period not less than one year in at least two different points of sale or by at least two persons, one of whom may be the franchisor or any of his associates.

If a franchisor does not practice in the Kingdom the franchised business on his own account, the master franchisee, who has the right to sub-franchise, may not sub-franchise or offer the same until he or any other franchisee practices the franchised business in the Kingdom for a period not less than one year.

2- Entering into a franchise agreement in Saudi Arabia:

A franchise agreement shall be drafted in Arabic and signed by the parties; if drafted in another language, a certified Arabic translation shall be provided.
In addition to the provisions agreed upon by the parties, a franchise agreement shall include the following:

• The franchised business and its description, as well as the franchise agreement’s term, manner of amendment, and geographical scope.
• Any amounts to be paid by the franchisee to the franchisor, including the initial franchise fee, the expenses for the franchisee’s personnel training, if any, and the technical support,
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  as well as the method for calculating payments made by the franchisee to the franchisor or any of the franchisor’s associates in return for goods or services.
• The parties’ obligations relating to the training of the franchisee’s personnel by the franchisor.
• The franchisor’s obligation to provide the franchisee with the technical and marketing expertise, and any other expertise required by the nature of the granted franchise.
• The franchisee’s obligation to comply with the instructions and marketing and display methods, and to preserve the identity of the franchise.
• The franchisor's obligations relating to the provision of goods or services to the franchisee, as well as the franchisee’s obligations relating to the receipt of such goods or services from
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  the franchisor, directly or through a third party, in accordance with the franchisor’s instructions.
• The franchisee’s right to use any trademark or any other intellectual property right relating to the franchised business, as well as the liabilities of the parties in case of infringement of intellectual property rights and damages arising therefrom.
• Manner of resolving any dispute arising from the franchise agreement.
• The franchisee’s right to sub-franchise, if any, and the relevant provisions.
• The consequences of any change in the ownership of the franchisee, the franchisor, or the person controlling either party.
• Any other provision provided for by the Regulations.
• The owner of the trademark shall determine the intellectual property rights granted by the franchise. Furthermore, the relation between the franchisor and the owner of these rights in instances where the franchisor is not the actual owner.
• The rights and obligations of both the franchisor and the franchisee concerning the termination of the franchise agreement.
• The franchisee’s right to renew or not renew the franchise agreement, or to extend it, if applicable.
• The rights and obligations of both the franchisor and the franchisee arising from the termination or expiration of the franchise agreement.
• Restrictions imposed on both the franchisor and franchisee regarding the conduct of any business that competes with the franchise business during the term of the agreement or after its termination or expiration, without prejudice to the provisions of the Competition Law.
• The franchisee shall not damage the franchisor’s reputation and the franchise business.
• The franchisee shall adhere to the location or premises of the franchise, if applicable, and he shall also be entitled to change such location or premises, if applicable.
• The franchisor and the franchisee shall ensure the confidentiality of sensitive information and comply with data protection regulations.

3- The registration of franchise agreement in Saudi Arabia:

The franchise agreement and disclosure document shall be registered with the Ministry of Commerce within ninety (90) days of the agreement’s execution by submitting copies of both documents to the relevant authority within the Ministry.

4- Providing the franchisee with a copy of the disclosure document:

The franchisor shall provide the franchisee with a copy of the disclosure document at least fourteen (14) days prior concluding the franchise agreement or from the date of any payment made by the franchisee in relation to the franchise, whichever is earlier.

If the franchisor submits to a prospective franchisee any information relating to the previous or projected financial performance of franchised business or any business owned by the franchisor or by any of its affiliates, the franchisor shall include such information in the disclosure document, ensuring that the information meets the requirements and provisions prescribed by the Regulations.

What Are the Franchise Fees in Saudi Arabia?

The registration of the franchise agreement fees shall be as follows:

• Registration fee for the franchise agreement and its disclosure document is (500) Riyals.
• Amendments fee for the franchise agreement is (100) Riyals.

What Are the Obligations of the Franchisor in Saudi Arabia?

Unless otherwise agreed in writing with the franchisee, the franchisor shall:

• Determine the rights granted to the franchisee with respect to the franchise.
• Specify the franchise business model in detail, including the criteria and instructions the
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  franchisee must follow in order to operate and manage the franchised business, as well as provide the franchisee with operation manuals.
• Train the franchisee’s personnel.
• Provide technical and marketing expertise and any other expertise required by the nature of
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  the granted franchise.
• Provide the franchisee, whether directly or through a third party, with the franchise goods or services during the validity of the franchise agreement, except for goods and services the franchisee is permitted to purchase from a third party.
• Maintain the confidentiality of the accounting and financial information and data relating to the franchisee’s business.
• Provide the franchisee, upon request, with details on amounts paid or to be paid with respect to operating the franchised business.
• Refrain from establishing any establishment that engages in a business activity similar to that of the franchisee within the geographical area defined in the franchise agreement, or granting a third party the right to do the same, during the validity of the franchise agreement.

What Are the Franchisee’s Obligations in Saudi Arabia?

Unless otherwise agreed in writing with the franchisor, the franchisee shall:

• Obtain the franchisor’s approval prior to any change in the goods, services, or manner of operating the franchised business.
• Provide the franchisor with the franchised business data necessary for developing the franchise
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  business model, including financial and accounting data.
• Enable the franchisor or his representatives to inspect the facilities used for operating the
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  franchised business, provided that such inspection does not result in disruption or harm to the
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  business.
• Obtain the franchisor’s approval prior to changing the place of operating the franchised business.

How to Renew a Franchise Agreement in Saudi Arabia?

Unless otherwise provided for in the franchise agreement, a franchisee seeking to renew or extend the franchise agreement shall notify the franchisor in writing within a period not less than 180 days prior to its expiration. The franchise agreement may be renewed or extended for a term similar to the term originally agreed upon and under the same terms and conditions, except in the

following cases:

• If the franchisor and franchisee agree on new terms and conditions.
• If any of the cases provided in Article 18 of this Law occurs.
• If the franchisee fails to pay amounts due under the franchise agreement.
• If, prior to the expiry of the agreement, the franchisor approves the franchisee’s assignment of the franchise agreement and franchised business to a third party who fulfills the franchisor’s criteria for granting the franchise.
• If the franchisor ceases to engage in franchising or in granting franchises in the Kingdom.
• If the franchisee does not conclude the franchise renewal or extension agreement prior to the 60 days preceding the expiration of the franchise agreement despite the franchisor’s reasonable requirements.

How to Assign a Franchise Agreement in Saudi Arabia?

Unless otherwise provided for in the franchise agreement, the franchisor’s approval shall be obtained prior to changing the person controlling the franchisee or assigning the franchise

agreement. If the franchisor grants his approval, he may not revoke it nor object to the change or assignment, except in the following cases:

• If the assignee is unlikely to have sufficient funds for carrying out the obligations borne by the franchisee under the franchise agreement.
• If the assignee is unable to meet the franchisor’s reasonable requirements with respect to the assignment of the franchise agreement and franchised business.
• If the assignee fails to meet the franchisor’s criteria for the selection of franchisees.
• If the assignee does not agree, in writing, to bear the franchisee’s obligations under the franchise agreement from the date of assignment thereof.
• If the franchisee does not pay the franchisor any due amounts.
• If the person expected to gain control over the franchisee initiates any bankruptcy proceedings.
• If the assignee does not obtain the required licenses and approvals to operate the franchise, or does not have the right to operate the franchise under a court order or legal provision.
• If the franchisee breaches any of its material obligations under the franchise agreement and fails to remedy the breach within fourteen (14) days of receiving written notice thereof from the franchisor.

What Are the Grounds for Termination or Expiration of a Franchise Agreement in Saudi Arabia?

Unless otherwise stipulated in the franchise agreement, if the franchisee is an individual, the franchise agreement shall terminate upon the commencement of any liquidation proceedings against him under the Bankruptcy Law, or upon his death, loss of legal capacity, or the occurrence of a health impediment that prevents him from carrying out the franchise business. The agreement may include a provision stipulating its transfer in the event of death, loss of legal capacity, or the occurrence of a health impediment to one or more of the franchisee's heirs or to another person.

Unless otherwise stipulated in the franchise agreement, if the franchisee is a legal entity, the franchise agreement shall terminate upon the issuance of a resolution for its voluntary liquidation, the commencement of any liquidation proceedings against it under the Bankruptcy Law, or upon its dissolution. The transformation or merger of the franchisee into another legal entity shall not result in the termination of the agreement.

In the event of a material breach by the franchisor of the disclosure or registration obligations as stipulated in the system and regulations, the franchisee may, before the expiration of one year from the date on which he becomes aware of the breach or before the expiration of three years from the date on which the breach occurred, whichever is earlier, terminate the franchise agreement by a written notice to the franchisor without any compensation to the franchisor.

How to Claim Compensation in Franchise Projects?

If the franchisor substantially breaches the disclosure or registry obligation stipulated in this Law
and its Regulations, the franchisee may claim damages for such breach without terminating the franchise agreement.

The franchisee's right to compensation is limited to losses or damages directly caused by the franchisor's material breach of its obligations.

Claims for damages arising from the franchisor's wrongful termination of the franchise agreement after three years from the date of termination shall not be heard.

Claims for damages arising from a breach of the system or the franchise agreement by either the franchisor or the franchisee shall not be heard after the expiration of one year from the date the non-breaching party becomes aware of the breach or after the expiration of three years from the date the breach occurred, whichever is earlier. Moreover, the filing of a claim under this system shall not preclude the franchisor or the franchisee from claiming any rights arising under any other law.

In conclusion, franchise in Saudi Arabia stands as an entrepreneurial opportunity that enables local investors to leverage established brands and ready-made business models. This contributes to reducing risks and increasing the chances of success in the business sector, with government and legislative support that enhances this model as a promising economic tool.

Our services in the field of franchise projects

At Dr. Fahad Alrefaei & Partners Consulting & Law Firm, we understand the importance of franchise projects in driving business expansion and boosting revenue. Therefore, we provide you with specialized legal services in this field, distinguished by quality, efficiency and experience.

Our Services Include:

• Franchise Agreement Drafting: Drafting specialized franchise agreements customized to meet your business needs and industry requirements.
• Legal Consultation: Offering comprehensive legal consultations on all aspects of franchise, including:
• Selecting appropriate partners
• Evaluating legal risks
• Protecting intellectual property
• Resolving disputes
• Training and Awareness: Conducting workshops and training sessions on franchise regulations and best practices.
• Registration and Licensing: Assisting with trademark registration and obtaining the necessary licenses.

For more information about our legal services, feel free to contact us at 920012753, via our email: [email protected], or request a legal consultation through our website.

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