Buying a Franchise in Saudi Arabia: How to Check Royalty Calculations

An ongoing royalty may look straightforward: a percentage of an outlet’s sales paid to the franchisor. But the actual cost depends on how sales are defined, when they are recognised and which exclusions are allowed. In Saudi Arabia’s franchise market, reviewing these details before signing helps establish a clearer relationship and prevents later disputes over the amount due each month. Do not compare brands solely by their advertised rates; compare what you would pay under each agreement’s rules.

Start with the contractual definition, not the advertised rate

A royalty is the ongoing payment specified in the agreement for the grant of franchise rights and the continuation of the relationship. It may be a percentage of sales, a fixed amount or a combination of the two. It is not necessarily a share of profit: it may be payable even when the outlet makes a loss. Start by finding the definition of ‘gross sales’ or ‘net sales’, then follow any cross-references to schedules and financial policies.

The relationship in Saudi Arabia is governed by the Commercial Franchise Law and its Implementing Regulations. Article 11 requires the agreement to specify any payments the franchisee must make to the franchisor, including the franchise fee. In practice, ask for wording that makes the royalty amount, or the method for determining it, clear. Do not rely on a percentage quoted in marketing material separate from the agreement.

Article 7 also requires the franchisor to provide a disclosure document at least 14 days before the agreement is signed or any franchise-related payment is made, whichever comes first. Use this period to check the royalty clause against the disclosure document and your financial model. If you find a discrepancy, ask for it to be resolved in writing before you commit, rather than explained verbally after signing.

Break down the royalty base by transaction type

Ask for a table showing how the agreement treats each type of transaction the outlet is expected to handle. The phrase ‘all revenue’ may include sums you would not regard as operating sales, while the word ‘net’ alone does not explain which deductions are permitted.

Pay particular attention to the following:

• Value added tax (VAT): Does the definition of sales exclude VAT when calculating royalties? Distinguish this from the tax treatment of the royalty invoice itself, and review both with your accountant.
• Returns and cancellations: Are these deducted when the customer is refunded? How are a sale and its subsequent refund treated if they fall in different reporting periods?
• Vouchers and gift cards: Is the royalty calculated when the card is sold or when it is redeemed? Ask for a mechanism that prevents the same transaction from being counted twice.
• Delivery platform sales: Is the calculation based on the order value before the platform’s commission, or on the amount transferred to the outlet’s account? Does it include delivery charges that the outlet does not retain?
• Discounts and reimbursements: How are discounts treated when the outlet bears the cost, or when the franchisor or another party reimburses it?

These are not exclusions automatically guaranteed to the franchisee; the agreement needs to settle them clearly. Do not assume that your bank statement represents the royalty base. Receipts may arrive after commissions have been deducted, while the agreement may use the sale value before those deductions.

Test the formula in weaker months too

Once the royalty base is defined, put the calculation into a separate financial model. Start with sales covered by the definition, subtract the agreed exclusions, then apply the percentage and any contractual minimum. If the royalty combines a fixed amount with a percentage, show the two components separately so that the true cost is not hidden within total expenses.

Test a partial opening month, a low-sales month and a month with a high proportion of delivery orders and refunds. The aim is not to predict the brand’s profitability, but to understand how the royalty behaves as the sales mix changes. Two months may have similar sales, yet leave different amounts of cash available after platform commissions and order fulfilment costs.

Ask specifically about any minimum payment: does it replace the percentage-based royalty when that calculation produces a lower amount, or is it added on top? Does it apply separately to each outlet? When does the payment obligation begin: on signing, on opening or on another date? Also check for stepped rates or periodic increases, and how closure days or operational interruptions are treated.

Ask the franchisor to review written worked examples covering these scenarios. Ideally, attach agreed examples to the contract and clarify how they relate to the contractual wording if there is a discrepancy, rather than relying on a spreadsheet that could be changed without agreement.

Clarify reporting, payment and adjustments

A complete formula is not enough if the procedures for applying it are unclear. Specify the source of sales data, the reporting cut-off, who prepares the royalty statement, and when invoices are issued and payments fall due. If a delivery platform’s report differs from the point-of-sale system, there must be a reconciliation process that prevents orders from being counted twice or omitted.

Negotiate a clear procedure for disputing errors: the documents required, the time allowed and how overpayments or underpayments will be settled. If the agreement gives the franchisor the right to audit sales, review the scope of the audit, the advance notice required, who pays for it and how discrepancies are established. Do not assume that raising a dispute automatically suspends payment; settle this point in the agreement with help from a legal adviser.

Practical takeaway: Before buying a franchise, ask for a precise definition of the royalty base, worked examples for unusual scenarios and a written process for correcting discrepancies. The best decision is not based on the lowest advertised percentage, but on a cost you can calculate and verify before signing.