Franchising is currently one of the most prominent investment models in Saudi Arabia, allowing investors to benefit from successful brands and robust business models within a clear regulatory framework. With its increasing popularity, understanding the terms and conditions of franchising has become crucial for ensuring a successful investment.

In this article, we'll explore everything you need to know about franchising in Saudi Arabia.

What is a Franchise?

A franchise is a contractual relationship between two parties:

• Franchisee: The owner of the brand and operating system.
• Franchisee: The investor who obtains the right to use the brand and operational expertise in exchange for specific financial commitments and conditions.

This system gives the investor the opportunity to operate a business under a well-known brand name, according to a proven business model, and within clear legal regulations.

Types of Franchise

According to practice, franchises are divided into three main types, each differing according to the nature of the relationship between the franchisor and the franchisee, and the details of the contract:

First: Business Model Franchise

This is the most common type in the Saudi market. In this type, the franchisee obtains the right to use the brand and its operating system, including the work mechanism, approved standards and procedures, technical support, management, marketing, and all other details.

Second: Product Distribution Model Franchise

This model is based on granting the franchisee the right to distribute or sell the brand's products according to a business model and providing specific expertise between the franchisor and the franchisee. It requires the franchisee's operational system and may also require administrative and marketing support. This is the core difference between a franchise and a commercial agency or distribution partnership. The franchise system excludes "agreements or contracts limited to the purchase and sale of goods or the provision of services bearing a specific brand" from its application. Therefore, if the relationship is limited only to the distribution or sale of products without the franchisor providing a business model, technical expertise, or imposing a specific operating method, it is not considered a franchise subject to the system.

Third: Manufacturing Franchise

This model allows the investor to manufacture, market, and sell products under the franchise name, provided they adhere to quality standards, specifications, and production guidelines based on a business model and technical expertise provided by the franchisor and adopted by the franchisee.

Key Points in a Franchise Agreement

To ensure a clear and successful relationship, Article Eleven of the Law and Article Eight of its Implementing Regulations mandate that the franchise agreement include several essential clauses, including:

• A description of the franchise business, its duration, and geographical scope.
• The financial compensation and its calculation mechanism.
• The obligations of both parties regarding training, provision of technical expertise, marketing, and maintaining the franchise identity.
• Intellectual property rights and the obligations of both parties in case of breach.
• The dispute resolution mechanism and the rights of renewal and termination.

Definition of the Franchise System in Saudi Arabia

Franchising in Saudi Arabia is governed by the Franchise System, issued by Royal Decree No. 22 dated 9/2/1441 AH (corresponding to 2019 CE), following approval by the Shura Council and the Council of Ministers. The system aims to regulate the contractual relationship between the franchisor and the investor, ensuring transparency, protecting the rights of both parties, and enhancing confidence in this investment model.

Royal Decree No. 22 dated 9/2/1441 AH (corresponding to 2019 CE) A specialized franchise center was established within the Ministry of Commerce by Cabinet Resolution No. 22 to handle all aspects of the franchise process, from registering agreements and promoting a franchise culture to enabling individuals and companies to adopt this model, assisting brands in expanding locally and globally, and increasing investment opportunities, thus contributing to the realization of Vision 2030.

Franchise Requirements in Saudi Arabia

The Saudi Franchise Law specifies requirements for both the franchisor and the franchisee to protect the rights of both parties and enhance transparency. These requirements are as follows:

First: Franchise Requirements for the Investor

- Carefully review the contract terms and conditions. It is recommended to consult a reputable law firm specializing in such transactions. Article Seven of the Franchise Law mandates that the franchisor provide the investor (potential franchisee) with a "Disclosure Document" at least fourteen (14) days before signing the agreement or making any payment. This document contains all essential details, rights, obligations, and risks.

- Provide the required capital to purchase the franchise, in addition to covering additional costs such as establishment and operating expenses. The regulations stipulate that the franchise agreement must clearly specify "any fees the franchisee is required to pay the franchisor" and the mechanism for calculating other amounts.

- Selecting and specifying a location that conforms to the standards and requirements of the franchisor's brand. The regulations stipulate that the franchisee is obligated to "obtain the franchisor's approval when changing the location of the franchise business." This means that the initial location selection, or any subsequent change, is subject to the franchisor's approval to ensure compliance with brand standards.

- Ensuring the franchisee receives administrative and marketing support from the franchisor to guarantee the project's success.

Secondly: Franchise Requirements for the Franchisee

- The franchisor must have actually operated the franchise using the franchise business model for at least one year, with at least two different sales outlets.

- The disclosure document must be provided to the investor or franchisee at least 14 days before signing the contract.

- The franchisor must provide the investor with operating manuals and all necessary guidance for establishing and operating the project.

- A confidentiality agreement must be concluded, emphasizing the non-disclosure of private information, data, and commercial information.

Finally, given the precise requirements and procedures of the Saudi Arabian franchise system, contracting with a specialized law firm is a crucial step to ensure the success of your franchise. Therefore, if you are considering this step, contact us at Mohammed Al-Khliwi Law Firm. We will handle the review and drafting of franchise agreements, prepare disclosure documents, and verify compliance with all required conditions, saving you time and effort and protecting you from potential legal risks.

Disclaimer: The above content does not constitute legal advice, and the firm assumes no legal responsibility. For legal consultations, please contact us.