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Franchising in Saudi Arabia: A Comprehensive Guide for Investors and Brand Owners

Franchising in Saudi Arabia has become an important business model for expansion and investment, whether for brand owners seeking to expand their presence and enter new markets or for investors looking for a business opportunity based on an established business model.

Franchising is not limited to using a well-known trade name or trademark. Rather, it is based on a contractual relationship involving mutual rights and obligations, as well as the use of a business model, brand identity, technical know-how, and marketing expertise under specific terms and conditions.

The Saudi legislator has established a regulatory framework governing the relationship between the franchisor and franchisee, enhancing transparency and disclosure while regulating various matters relating to the franchise agreement, disclosure, registration, renewal, termination, and rights associated with trademarks.

What Is a Franchise?

A franchise is a business model under which the franchisor grants another party, the franchisee, the right to conduct the franchise business in accordance with the business model developed by the franchisor and to use the trademark, trade name, and other intellectual property rights associated with the business, in return for consideration and subject to the terms agreed upon in the franchise agreement.

Accordingly, the franchisee does not necessarily have to establish a business entirely from scratch. Instead, the franchisee operates according to a defined business model, operational requirements, brand identity, and standards established by the franchisor.

The franchisor, in turn, benefits from expanding its market presence through other parties operating under the agreed franchise model.

Why Is Franchising Important in Saudi Arabia?

The franchise sector in the Kingdom has experienced notable growth in recent years. According to data published by the Saudi Ministry of Commerce, the number of registered franchise records increased from 185 in the fourth quarter of 2021 to 1,788 by the end of the third quarter of 2024.

This growth reflects increasing interest in franchising among both brands and investors, particularly in sectors such as restaurants, hospitality, retail, and other businesses.

However, the growth of the franchise market does not mean that every franchise opportunity is suitable for every investor. Opportunities differ in terms of costs, business models, contractual obligations, market conditions, and location.

Therefore, carefully reviewing the contractual relationship, obligations, costs, and potential risks before signing is an essential step for any prospective franchisee.

First: The Parties to a Franchise Relationship

A franchise relationship generally consists of two main parties:

1. The Franchisor

The franchisor is the owner of the business model or the entity that holds the rights necessary to grant the franchise. The franchisor grants the franchisee the right to conduct the franchise business subject to the agreed terms and conditions.

Depending on the agreement and the nature of the franchise, the franchisor may also be responsible for providing the necessary technical, marketing, and other forms of support and expertise related to the franchise business.

2. The Franchisee

The franchisee is the investor or entity that obtains the right to conduct the franchise business in accordance with the model established by the franchisor.

Under the franchise agreement, the franchisee is generally required to maintain the franchise’s identity and comply with operational, marketing, and other requirements agreed upon by the parties.

Second: What Should an Investor Know Before Buying a Franchise?

Entering into a franchise business should not be based solely on the popularity or reputation of the brand.

A prospective investor should carefully evaluate several aspects before signing the franchise agreement, including:

1. Brand Strength

The investor should assess the brand’s market presence and reputation, its target customers, and its suitability for the market and geographic area in which the business will operate.

2. The Business Model

The investor should understand how the business operates and what resources are required, including:

Staffing and operational requirements.
Equipment and facilities.
Operational standards.
Marketing methods.
Training and technical support.
Supplier requirements.
Quality control standards.

3. Costs and Financial Consideration

It is important to evaluate all costs associated with the franchise, rather than focusing only on the initial franchise fee.

Financial obligations may include franchise-related fees, training and technical support costs, as well as the mechanisms used to calculate payments for goods or services provided by the franchisor or entities affiliated with it.

The investor should also assess expected operating expenses, including rent, salaries, marketing, equipment, inventory, and other costs.

4. Geographic Territory

The investor should understand the geographic territory covered by the franchise and whether the agreement grants exclusive rights within a specific area or allows additional franchises to be granted within the same territory.

5. Agreement Term and Renewal

The investor should understand the term of the franchise agreement, the conditions for renewal or extension, and the obligations imposed on each party when the contractual relationship ends.

Third: The Franchise Disclosure Document

The Franchise Disclosure Document (FDD) is one of the key elements of the regulatory framework governing franchising in Saudi Arabia.

The franchisor is required to provide the prospective franchisee with the disclosure document before entering into the franchise agreement or before the payment of any consideration relating to the franchise, within the period prescribed by law.

According to the Ministry of Commerce, the disclosure document must be provided at least 14 days before entering into the franchise agreement or before the date on which the franchisee pays any consideration relating to the franchise, whichever occurs first.

The purpose of the disclosure document is to enable the prospective investor to review important information concerning the franchise opportunity before making a decision.

Accordingly, the disclosure document should not be treated as merely a formal document. It should be carefully reviewed and analyzed, and the information contained in it should be compared with the terms and representations set out in the franchise agreement.

It is also important to verify the consistency of the information contained in the disclosure document with the information and marketing materials provided by the franchisor regarding the investment opportunity.

Fourth: The Franchise Agreement

The franchise agreement forms the legal foundation governing the relationship between the franchisor and franchisee. Signing the agreement without a thorough review may result in future disputes or unexpected obligations.

The Ministry of Commerce requires the franchise agreement to be written and signed by both parties. If the agreement is drafted in a language other than Arabic, it must be translated into Arabic by a certified translator.

Among the key matters that should be addressed in the agreement, in accordance with the applicable regulatory requirements, are:

Description of the franchise business.
Term of the agreement.
Geographic territory.
Financial consideration.
Training and technical support.
Supply obligations.
Use of trademarks and intellectual property rights.
Dispute resolution mechanisms.
Sub-franchising, where applicable.
Changes in ownership of either party.
Restrictions on the transfer of rights.
Renewal or extension.
Termination of the agreement and its consequences.
Non-compete restrictions.
Confidentiality and data protection.
Obligations relating to the business premises.

Accordingly, having the franchise agreement reviewed by a qualified legal professional before signing is an important step for both investors and franchisors.

Fifth: Franchise Registration in Saudi Arabia

The Ministry of Commerce provides an electronic service for franchise registration, including registration, amendment, and cancellation of franchise records.

The Ministry states that the franchisor must register each signed franchise agreement and the related disclosure document with the Ministry within 90 days from the date of signing the agreement, subject to the applicable requirements for registering amendments and cancelling the registration where relevant.

The key documents required for franchise registration include:

The franchise agreement.
The disclosure document.

The Ministry of Commerce’s service currently indicates fees of SAR 500 for franchise registration and SAR 100 for amending the registration.

The applicable fees and procedural requirements should be verified with the Ministry of Commerce before submitting an application, as government services, fees, and requirements may be updated.

Sixth: Franchising and Intellectual Property

Franchising is closely connected to intellectual property rights, particularly trademark rights.

Under the franchise agreement, the franchisee receives the right to use the trademark and other intellectual property rights associated with the franchise business, subject to the terms and restrictions specified in the agreement.

Therefore, the agreement should clearly regulate the use of the trademark, the obligations relating to maintaining and protecting it, and the consequences of any infringement of intellectual property rights.

It is also important to verify:

The owner of the trademark.
The franchisor’s authority to grant rights to use the trademark.
The scope of the license granted.
The duration of trademark usage rights.
Restrictions on trademark use.
The consequences of expiration or termination of the franchise agreement.

These matters become particularly important where the trademark is owned by another company or where multiple licenses or contractual arrangements relating to the intellectual property are involved.

Seventh: What Risks Should Investors Consider?

Before entering into a franchise agreement, investors should carefully assess the potential risks, including:

Financial Risks

These may include increased operating costs, fees, or financial obligations associated with the business, as well as differences between actual costs and initial estimates.

Contractual Risks

These may include long-term obligations, specific termination conditions, or particular requirements for renewal or non-renewal.

Location Risks

The success of certain businesses may depend significantly on the location of the branch, the characteristics of the customer base, demand, and competition in the area.

Brand Risks

Changes affecting the reputation, business model, or strategy of the brand may have an impact on franchisees operating under that brand.

Supply Risks

Certain businesses may depend on specific suppliers or particular conditions for obtaining products and services. Accordingly, investors should understand supplier obligations, costs, and supply arrangements.

Dispute Risks

Disputes may arise regarding financial consideration, operations, supply, trademark use, or termination of the agreement.

For this reason, the dispute resolution mechanism should be clearly defined in the franchise agreement.

Eighth: What Should Brand Owners Know Before Granting a Franchise?

Franchising is not simply a means of increasing the number of branches.

A brand owner seeking to expand through franchising needs a clear and commercially viable business model, defined operating procedures and standards, and a system for training and monitoring franchisees.

The applicable laws and regulations also establish requirements for conducting franchise activities before offering or granting a franchise. Among these requirements is operating the franchise business in accordance with the business model for at least one year through at least two different outlets or points of sale, subject to the applicable cases and conditions.

Accordingly, expanding through franchising requires an integrated legal, commercial, and operational framework, rather than simply owning a successful trademark.

Ninth: Common Mistakes Before Signing a Franchise Agreement

Some of the most common mistakes that should be avoided include:

1. Relying Solely on Brand Recognition

Without reviewing the financial figures, costs, contractual terms, and business model.

2. Signing the Agreement Without Legal Review

Particularly provisions relating to termination, renewal, financial obligations, and contractual restrictions.

3. Failing to Carefully Review the Disclosure Document

Despite its importance in evaluating the franchise opportunity and understanding information about the franchisor and business model.

4. Overlooking Intellectual Property Rights

Failing to verify the franchisor’s right to use the trademark and grant rights to use it.

5. Failing to Clearly Define Responsibilities

Particularly responsibilities relating to training, supply, marketing, technical support, maintenance, and quality control.

6. Failing to Understand the Dispute Resolution Mechanism

The parties should understand the competent forum, the dispute resolution process, and the consequences of termination or expiration of the agreement.

Tenth: Is Franchising Suitable for Every Investor?

Franchising cannot be considered suitable for every investor or every business as a general rule.

The decision depends on a range of factors, including:

Available capital.
Nature of the business.
Location.
Investment and operating costs.
Investor experience.
Franchisor’s terms and conditions.
Contractual obligations.
Agreement term.
Renewal and termination conditions.
Market conditions and competition.
Compatibility of the business model with the investor’s objectives.

Accordingly, the investment opportunity, franchise agreement, disclosure document, and financial and operational obligations should be evaluated together before making a decision.

Conclusion

Franchising in Saudi Arabia represents an important model for business expansion and investment. At the same time, it is based on a contractual relationship involving specific requirements, rights, and obligations that should be fully understood before entering into the arrangement.

For investors, the assessment should not be limited to the reputation of the brand. Instead, it should include a review of:

The disclosure document.
The franchise agreement.
Costs and financial consideration.
The business model.
The geographic territory.
The agreement term.
Renewal and termination conditions.
Intellectual property rights.
Supply obligations.
Dispute resolution mechanisms.

For brand owners, it is important to establish a comprehensive franchise model, properly structure the contractual relationship, comply with disclosure and registration requirements, and protect the brand and intellectual property rights.

The Ministry of Commerce also emphasizes the importance of complying with the requirements of the Franchise Law and its Implementing Regulations, and has identified a number of violations relating to disclosure, registration, and conducting franchise activities before satisfying the applicable regulatory requirements.

Do You Need a Franchise Agreement Review?

If you are an investor considering entering into a franchise, or a brand owner planning to grant franchises, obtaining specialized legal advice on the franchise agreement, disclosure document, and related regulatory and commercial obligations is an important step before proceeding.

Suleiman Al-Omari Law Firm

Suleiman Al-Omari Law Firm provides specialized legal services in reviewing and drafting franchise agreements and protecting intellectual property rights through lawyers and legal and Sharia consultants, in accordance with the laws and regulations applicable in the Kingdom of Saudi Arabia.

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Legal Disclaimer: This article is provided for general informational purposes only and does not constitute legal advice for any specific case. Rights, obligations, and procedures may vary depending on the facts of each case, the nature of the relevant procedure, and the laws and regulations in force. Professional legal advice should be obtained where appropriate.