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Franchise in Saudi Arabia: Can You Sell or Transfer Franchise Rights?

A franchise business in Saudi Arabia may begin with great enthusiasm: a well-known brand, a ready-made business model, training and support from the franchisor, and an investor who sees franchising as an opportunity to enter an established market instead of building a business from scratch.

But what happens if circumstances change after the business has started?

What if the franchisee wants to exit the business? Can the franchisee sell the franchise business to another investor? Can the franchise rights be transferred to another individual or company? Is the franchisor’s approval required? And can the franchisor refuse the transfer?

These questions may seem straightforward, but they are directly connected to the franchise agreement between the parties and the laws and regulations governing franchising in the Kingdom of Saudi Arabia.

The issue is particularly important because the Saudi Franchise Law does not treat franchising as an ordinary commercial contract. Instead, it establishes a legal framework governing the relationship between the franchisor and the franchisee and sets out various rights and obligations relating to the franchise agreement, including matters concerning the assignment of the franchise agreement and franchise business to a third party.

The franchise agreement must also address any restrictions imposed on the franchisee regarding the transfer of its rights to third parties.

Therefore, the answer to the question:

Can you sell or transfer franchise rights in Saudi Arabia?

is not simply “yes” or “no.” It depends on the nature of the transaction, the provisions of the franchise agreement, and the applicable legal and regulatory requirements.

What Does a Franchise Right Mean?

A franchise arrangement, or Franchise, essentially involves one party, known as the “Franchisor,” granting another party, known as the “Franchisee,” the right to conduct certain business activities using a business model, trademark or trade name, and related intellectual property rights, subject to agreed terms and conditions.

Franchising differs from simply purchasing a product or using a trademark because the relationship generally involves an integrated business model, together with mutual obligations relating to operations, marketing, training, support, maintaining brand identity, and other matters.

Accordingly, the franchisee is not simply purchasing a “brand name.” Rather, the franchisee obtains a specific contractual right to operate the franchise business within a defined legal and commercial framework.

This is why the question of selling or transferring that right is particularly important.

If the right is connected to a specific individual or company and subject to specific conditions, it should not necessarily be treated like an ordinary commercial asset that can be transferred freely to any third party.

Can a Franchisee Sell or Transfer Franchise Rights?

As a general principle, the assignment of a franchise agreement and franchise business to a third party is subject to the applicable legal requirements and the provisions of the franchise agreement.

This is particularly important because the franchise agreement should address, among other matters:

- The franchisee’s right to grant a sub-franchise to a third party and the applicable conditions.

- The consequences of a change in ownership of the franchisee or franchisor, or the person controlling either of them.

- Any restrictions imposed on the franchisee regarding the transfer of any rights under the franchise agreement to a third party.

Therefore, an investor who wishes to sell a franchise business or transfer its rights to another investor should not begin the sale process first and only later determine the franchisor’s position.

Instead, the first step should be to review the franchise agreement carefully and determine:

- Does the agreement permit assignment?

- What procedures must be followed?

- Is the franchisor’s approval required?

- What requirements must the proposed transferee satisfy?

- Are there restrictions relating to ownership or control?

Is the Franchisor’s Approval Always Required?

This is one of the most important issues to consider.

The Implementing Regulations of the Saudi Franchise Law specifically address changes in the person controlling the franchisee and the assignment of the franchise agreement and franchise business to a third party.

Under the Regulations, a franchisor may not object to a change in the person controlling the franchisee, or object to the franchisee’s assignment of the franchise agreement and franchise business to a third party, or withdraw its approval after granting it, except in specified circumstances.

This means that the matter is not left entirely to the franchisor’s discretion. At the same time, the franchisee does not have an unrestricted right to transfer the franchise agreement to any person of its choice.

The legal framework seeks to balance two interests:

- Protecting the franchisee against unjustified refusal.

- Protecting the franchisor against the transfer of franchise rights to a person who may not be suitable to operate the business.

When Can the Franchisor Object to the Transfer?

The Implementing Regulations identify certain circumstances in which the franchisor may have grounds to object.

For example, an objection may arise where bankruptcy proceedings have been initiated against the person who is expected to obtain control of the franchisee.

Other possible grounds include:

- The proposed transferee does not hold the licenses or approvals required to conduct the franchise business.

- The proposed transferee is prohibited from conducting the relevant business under a court judgment or applicable law.

- The franchisee is in material breach of its obligations under the franchise agreement and has failed to remedy the breach within the specified period after receiving written notice.

This highlights the importance of understanding the franchise agreement and applicable legal requirements before announcing the sale of the franchise business or offering to transfer the franchise rights to another party.

An investor may assume that finding a financially suitable buyer is sufficient to complete the transaction. However, additional requirements may apply concerning experience, licenses, contractual obligations, or the legal status of the proposed transferee.

The Difference Between Selling a Franchise Business and Transferring Franchise Rights

One of the common mistakes is confusing the sale of the business with the transfer of franchise rights.

A franchisee may own a store or business operating under the franchise model, including assets, equipment, inventory, contracts, employees, and a commercial location.

However, selling some of these assets does not necessarily mean that the buyer has acquired the right to operate the business under the same brand.

The franchise right is connected to the contractual relationship with the franchisor and the agreement granting that right.

Therefore, if an investor wishes to sell a franchise business to another party while allowing the buyer to continue using the brand and business model, simply entering into a sale agreement for the premises or equipment may not be sufficient.

The franchise rights themselves must be dealt with in accordance with the applicable contractual and legal requirements.

This distinction can help prevent disputes that may arise when one party treats a franchise as merely a store that can be sold without considering the contractual nature of the rights allowing the use of the brand and business system.

Can Franchise Rights Be Transferred to a Company Instead of an Individual?

The legal structure or ownership of the franchisee may change. In such cases, it is important to distinguish between a change in certain ownership elements and an actual assignment of the franchise agreement and franchise business.

For this reason, the franchise agreement should address the consequences of a change in ownership of the franchisee or franchisor, or the person controlling either of them.

If the proposed change results in control or rights being transferred to a new party, the agreement and applicable laws should be reviewed to determine the appropriate procedure.

It may be a mistake to implement the change first and attempt to correct the legal position later.

Accordingly, any transaction involving a change in ownership, control, or the assignment of franchise rights should be subject to prior legal review.

What If the Franchisor Refuses to Approve the Transfer?

A refusal by the franchisor does not automatically mean that the refusal is either valid or invalid.

The first step is to determine the reason for the refusal.

If the refusal is based on a reason permitted by the applicable laws, regulations, or franchise agreement, it may have a valid legal basis.

However, if the refusal is not based on a legally recognized or contractually valid ground, a legal assessment may be required to determine the options available to the franchisee.

It is therefore important to retain:

- Correspondence.

- Notices.

- Assignment requests.

- Responses received from the franchisor.

- Documents relating to the proposed transferee.

The transfer request should also be clear and specific and should contain sufficient information to enable the franchisor to assess the proposed transferee.

What Should You Review Before Buying a Franchise Business from an Existing Franchisee?

If you are an investor considering purchasing a franchise business in Saudi Arabia from an existing franchisee, you should look beyond sales figures, location, and brand recognition.

Several legal and commercial matters should be reviewed before completing the transaction.

1. The Original Franchise Agreement

Review the original franchise agreement and determine its duration, the rights and obligations of the parties, and the conditions governing assignment.

2. Restrictions on Transfer

Identify any contractual restrictions on the transfer or assignment of franchise rights.

3. Franchisor Approval

Determine whether approval is required and, if so, understand the procedure for obtaining it.

4. Remaining Franchise Term

Purchasing a business with only a short period remaining on its franchise agreement may be materially different from purchasing a business with several years remaining.

5. Existing Franchisee Obligations

Verify whether there are any outstanding breaches or material obligations that could affect the transfer.

6. Licenses and Approvals

Verify that all licenses and approvals required to operate the business are in place.

7. Existing Disputes

Check whether there are any lawsuits, disputes, or claims relating to the business or franchise agreement.

8. Obligations Toward the Franchisor

Determine whether any fees, payments, or contractual obligations must be settled before or at the time of the transfer.

9. Trademark and Intellectual Property Rights

Ensure that the buyer will be legally entitled to continue using the trademark and other intellectual property after the transaction.

Can You Sell a Franchise Without the Franchisor’s Approval?

A franchise transfer should not be treated like an ordinary business sale.

Even if the franchisee has found a buyer willing to pay the agreed price, this does not automatically mean that the franchise rights have been transferred.

The reason is that a franchise is based on an integrated contractual and commercial relationship between the franchisor and franchisee.

The franchise agreement should address assignment and restrictions on the transfer of rights to third parties, while the Implementing Regulations govern circumstances in which the franchisor may object to a transfer.

Accordingly, completing the sale without properly addressing the franchise rights and applicable procedures may result in a dispute between the seller, buyer, and franchisor.

What About Sub-Franchising?

A sub-franchise is different from simply assigning or transferring franchise rights.

A sub-franchise generally involves the franchisee granting another party certain rights under a structure permitted by the applicable laws and the franchise agreement.

Therefore, where applicable, the franchise agreement should address the franchisee’s right to grant a sub-franchise and the conditions governing such a grant.

It is important not to assume that a franchisee automatically has the right to grant a sub-franchise to another investor.

The franchise agreement and applicable legal requirements should be reviewed before taking such action.

Importance of Registering and Updating the Franchise Agreement

Another important consideration is that the Saudi Ministry of Commerce provides electronic services for registering, amending, and canceling franchise agreements.

Where a franchise agreement is amended by changing either of its parties or its term, the franchisor is required to register the amendment with the Ministry within 90 days from the date of the amendment, by submitting a copy of the signed amendment.

The Ministry of Commerce has also emphasized the importance of complying with the requirements for registering the franchise agreement and disclosure document and has highlighted the requirement to register amendments when the parties or term of the franchise agreement change within the prescribed period.

This demonstrates that a franchise transfer is not merely a private agreement between the seller and buyer. It may also involve regulatory registration and updating requirements.

What Documents Should Be Reviewed Before Transferring Franchise Rights?

Before entering into an assignment or transfer of franchise rights, it is important to collect and review the relevant documents, including:

- The original franchise agreement.

- The relevant disclosure document.

- Any previous amendments to the franchise agreement.

- Correspondence with the franchisor.

- Documents relating to the business.

- Licenses and approvals.

- Documents proving ownership of the assets being sold.

- Any agreements relating to the business location.

- Documents relating to trademarks and intellectual property.

- Evidence concerning material breaches or existing disputes, where applicable.

The existence of these documents alone does not guarantee that the transfer will be legally effective. Their contents and the relationship between them must also be carefully analyzed.

Common Mistakes to Avoid When Selling or Transferring Franchise Rights

Several mistakes can increase the risk of disputes.

Mistake 1: Signing the Sale Agreement Before Reviewing the Franchise Agreement

A franchisee may sign a sale agreement and only later discover that the transfer requires specific procedures or approvals.

Mistake 2: Treating the Trademark as the Franchisee’s Property

The franchisee generally receives contractual rights to use the trademark. This does not necessarily mean that the franchisee owns the trademark.

Mistake 3: Ignoring the Requirements Applicable to the Transferee

The proposed transferee may need to satisfy specific requirements relating to licensing, qualifications, or the ability to operate the business.

Mistake 4: Failing to Document Approvals

Any approval relating to the transfer should be clearly documented and properly retained.

Mistake 5: Ignoring Existing Obligations

Material breaches or outstanding obligations may affect the proposed transaction.

Mistake 6: Failing to Update Regulatory Records

When the parties or term of a franchise agreement change, the applicable registration and updating requirements with the Ministry of Commerce should be addressed.

Why Does a Franchise Transfer Require Legal Review?

A franchise transfer in Saudi Arabia may involve several legal and commercial elements at the same time.

The transaction may include:

- A business sale agreement.

- A franchise agreement.

- Intellectual property rights.

- Financial obligations.

- Licenses.

- Approvals.

- A change in ownership or control.

For this reason, misunderstanding a single provision of the franchise agreement may create significant problems.

For example, a new investor may pay the full purchase price and later discover that the right to use the trademark has not transferred in the manner the investor expected.

Likewise, a franchisee may believe that the sale is complete, only to discover that certain obligations or regulatory procedures remain outstanding.

This is why consulting a franchise lawyer in Saudi Arabia can be important when reviewing the relevant documents and identifying the rights and obligations of each party before completing the transaction.

Conclusion

The answer to the question “Can a franchisee sell or transfer franchise rights in Saudi Arabia?” requires consideration of three key elements:

1. The Saudi Franchise Law.

1. The Implementing Regulations.

1. The franchise agreement entered into between the parties.

Franchise rights are not simply an ordinary asset that can always be transferred in the same way as other business assets.

The legal framework permits the assignment of a franchise agreement and franchise business to a third party while regulating the circumstances in which a franchisor may object. It also requires the franchise agreement to address restrictions on the transfer of rights and the consequences of changes in ownership or control.

Therefore, if you are a franchisee considering selling your business or transferring your franchise rights, or if you are an investor considering purchasing an existing franchise business, it is important not to sign the sale agreement before reviewing the franchise agreement and related documents and confirming the applicable legal and regulatory procedures.

It is also important to consider the Ministry of Commerce’s requirements concerning the registration and amendment of franchise agreements, particularly where the parties or term of the agreement change.

Ultimately, proper legal handling of franchising in Saudi Arabia can help protect the transaction and reduce the risk of future disputes between the franchisor, franchisee, and new investor.

Lawyer Suleiman Al-Omari Office

Lawyers and Legal & Sharia Consultants

📞 Contact: +966 53 777 8130
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Legal Disclaimer: This article is provided for general informational and educational purposes regarding franchising, franchise rights, and the transfer of franchise rights in Saudi Arabia. It does not constitute legal advice and should not be considered a substitute for obtaining specialized legal advice or reviewing the specific franchise agreement and circumstances of each case.