Buying a Franchise in Saudi Arabia: Can You Grant Sub-Franchises?

A franchisor may offer you an opportunity to expand through other investors, rather than solely through outlets you own. Before buying the franchise, ask: are you acquiring only the right to operate, or also the right to grant sub-franchises? In franchising, this distinction changes your responsibilities, income streams and risks. Do not assess the offer on the basis of the potential number of outlets until you have confirmed which rights you can actually exercise.

Distinguish between operating your own outlets and granting rights to others

The right to open several outlets does not automatically allow you to enter into agreements with independent franchisees. In the first case, you expand through your own business and bear the operating costs directly. In the second, you grant another party the right to operate the franchised business under a sub-franchise agreement. Your role then extends beyond managing a network of outlets you own.

Do not rely on labels such as ‘regional partner’ or ‘exclusive developer’. Ask for clear contractual wording defining your right to grant sub-franchises, its geographical scope, the activities it covers, its duration and whether the franchisor must approve each new sub-franchisee. You may have exclusive operating rights without any authority to grant rights to others.

Also check who will sign the agreement with the new investor. Will you be the franchisor under the sub-franchise agreement, or will the brand owner contract with the investor directly and pay you for introducing or supporting them? Responsibilities and cash flows differ between these arrangements; describing both as expansion opportunities is not enough.

Understand the legal requirements before marketing opportunities

These relationships are governed by Saudi Arabia’s Commercial Franchise Law and its Implementing Regulations. The law applies to franchise agreements performed within the Kingdom. Required agreement provisions include the franchisee’s right to grant sub-franchises to others and the terms governing that right. It should therefore be defined in the contract, not merely promised in a sales proposal.

Article 5 contains an important rule: if the franchisor does not itself operate the franchised business in the Kingdom, a franchisee with sub-franchising rights may not offer the opportunity or grant a franchise until it, or another franchisee, has operated the business in the Kingdom for at least one year. This rule applies to offering the opportunity, not just signing an agreement.

Ask for dated evidence of the local operations on which the offer relies, and have your adviser check how this requirement applies to the proposed structure. Do not assume that the brand’s success outside Saudi Arabia is enough to bypass the requirement. Nor should you plan to collect fees from new investors before establishing when you may lawfully offer and grant franchises.

Where you act as the franchisor in a sub-franchise relationship, you must also arrange for the relevant disclosure and registration obligations to be met. The disclosure document must be provided at least fourteen days before the agreement is signed or any franchise-related payment is made, whichever occurs first. The franchisor must also register the agreement and disclosure document with the Ministry of Commerce within ninety days of signing.

Turn sub-franchising rights into enforceable obligations

Permission to grant sub-franchises does not, by itself, answer the question of who will support the sub-franchisees. Before buying, ask for a schedule allocating responsibilities between you and the original franchisor. It should specify what you can provide yourself and what depends on the franchisor’s involvement. Make sure it answers these questions:

• Who screens and approves candidates, and within what timeframe?
• Who supplies the operating manuals, and who has authority to make them available to sub-franchisees?
• Who provides training and technical support, and monitors compliance with brand standards?
• Who handles complaints and resolves failures in support or conflicting instructions?
• Who prepares the sub-franchise documentation and manages disclosure and registration procedures?

This contractual allocation does not remove statutory obligations from the party legally responsible for them. Its purpose is to avoid a gap in which you promise a service without having the resources or authority to provide it. Also request the template sub-franchise agreement before signing your own agreement: it may reveal restrictions that make the opportunity harder to market than the main proposal suggests.

Test the returns and the continuity of sub-franchise agreements

Assess the financial viability of the sub-franchising rights separately from that of operating your own outlet. Record the amount you must pay for those rights and the franchisor’s share of initial and ongoing fees, then deduct the cost of recruiting, screening, training and supporting candidates. Do not treat every fee you collect as available profit.

Ask for clarity on when the franchisor’s share becomes payable: on signing the sub-franchise agreement, or only when you actually receive payment? What happens if a candidate withdraws or delays opening? Model a scenario in which you grant no sub-franchises during the initial period, so you can judge whether your commitments remain affordable without that income.

Finally, review what happens to sub-franchise agreements if your original agreement ends. Do not assume that they automatically transfer to the franchisor or terminate without consequences. Ask for explicit provisions covering continuity of operations and support, fees already paid, outstanding liabilities, and how sub-franchise terms compare with the time remaining under your own agreement.

Practical takeaway: Do not pay for sub-franchising rights until you have four things in place: clear contractual permission, confirmation that the requirements for offering and granting franchises are met, a written allocation of responsibilities, and a financial assessment that does not depend on guaranteed expansion.