Franchise agreements are among the most prevalent and significant agreements in the Kingdom of Saudi Arabia, as they serve as essential tools to stimulate small and medium-sized enterprises in the Kingdom. Consequently, the Kingdom has ensured the issuance of a system encompassing all the regulations of franchising, known as the Franchise Law, issued by Royal Decree No. (M/22) dated 09/02/1441 AH, along with its implementing regulations.
What is the importance of franchising in the Kingdom of Saudi Arabia?
The Franchise Law was enacted to establish a legislative framework for commercial systems in line with the Kingdom’s Vision 2030. The Franchise Law in the Kingdom of Saudi Arabia regulates the relationship between the franchisor and the franchisee, providing necessary protection for both parties.
One of the important and recent developments regarding franchising is the amendment of the Disclosure Document requirements annexed to the implementing regulations of the Franchise Law, pursuant to Minister of Commerce Decision No. 339 dated 14/08/1444 AH. This document is aptly named the Disclosure Document as it includes disclosures of the key rights, obligations, and substantial risks related to franchise opportunities.
How is the franchise process conducted in the Kingdom of Saudi Arabia?
According to Article 1 of the Franchise Law, franchising in the Kingdom is conducted as follows:
A natural or legal person known as the franchisor grants the franchise rights to another person known as the franchisee, allowing the franchisee to operate the franchise business under the franchisor’s trademark and trade name, which the franchisor owns and is licensed to use.
Additionally, the franchisor provides the franchisee with technical know-how, expertise, and marketing techniques, and specifies the method of operating the franchise business. This is done for a financial or non-financial consideration agreed upon by both parties initially, noting that this does not include the amounts paid by the franchisee to the franchisor for goods or services purchased throughout the agreement’s term.
Can the franchisor offer franchise opportunities or grant a franchise at any time?
The answer is absolutely no.
According to Article 5 of the Franchise Law, a franchise cannot be granted unless the franchise business has been operated for at least one year by two different persons or at two different sales outlets. One of these persons can be the franchisor or any person within the franchisor’s group.
Furthermore, if the franchisor does not operate the franchise business itself in the Kingdom of Saudi Arabia, the franchisee who, according to the franchise agreement, has the right to grant a sub-franchise, cannot grant a franchise unless he or another franchisee has operated the franchise business in the Kingdom of Saudi Arabia for at least one year.
What are the types of franchise agreements in the Kingdom of Saudi Arabia?
Franchising in the Kingdom of Saudi Arabia encompasses more than one type; it does not have a single framework or type but varies to suit the nature of the entity and the commercial activity. The types of franchise agreements recognized in the Kingdom include:
Manufacturing: This type involves transferring the technical knowledge necessary for manufacturing/assembling products from the franchisor to the franchisee, making the franchisor obligated to reveal the secrets of product manufacturing to the franchisee to match the franchisor’s main operations. The franchisor supervises the manufacturing and production process to ensure compliance.
Distribution: In this type of franchise, the franchisor markets its products within a specific distribution system, obliging the franchisor to supply the franchisee with the goods and products under the franchise agreement within the agreed period. Additionally, the franchisor provides technical support regarding marketing and technology. In return, the franchisor has the right to monitor and supervise the franchisee’s operations to ensure adherence to the franchise business model.
Business Format: A key aspect of this type of franchise is the focus on the brand’s reputation and customer recognition, leading to the establishment of numerous franchise agreements. This type is similar to a trademark licensing agreement.
Services: Although similar to other types, this franchise type is characterized by the methods required to attract customers. Through this type, the franchisor can provide certain services at the franchisee’s disposal to be offered under the franchisor’s responsibility.
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