Buying a Franchise in Saudi Arabia: How to Review a Non-Compete Clause

You may find a suitable brand and a workable budget, only to discover that the franchise agreement restricts another business you own or prevents you from working in a familiar field once the relationship ends. In the Saudi franchise market, a non-compete clause deserves a separate review before you buy: it affects more than the running of your outlet and could shape your investment options for years. The aim is not to reject every restriction, but to understand what it protects, whom it covers and what it could cost you in practice.

What does Saudi law require?

Franchise relationships in Saudi Arabia are governed by the Commercial Franchise Law and its Implementing Regulations. The Regulations require the agreement to set out any restrictions on the franchisor and franchisee carrying on competing businesses during the agreement or after its termination or expiry, without prejudice to the provisions of the Competition Law.

This does not mean that every written clause is legally valid, or that there is a standard duration suitable for every brand and business activity. The wording, the circumstances of the relationship and the restriction’s impact should be assessed with a specialist Saudi lawyer, particularly where the prohibition extends beyond the franchised business or covers a broad geographical area.

The Law 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 occurs first. The Regulations also require a template agreement to be attached to the disclosure document. Use this period to review the restriction within the full contract, rather than relying on a verbal assurance that it is a ‘standard clause’.

Ask for the Arabic version, or a certified Arabic translation if the agreement is in another language. Check that the definition of competing activity is consistent across versions and schedules: a single word can significantly widen the scope of the prohibition.

Map out exactly what the clause prohibits

Start by breaking the clause down into elements you can test. Do not settle for wording such as ‘engaging in competing activity is prohibited’. Ask for written answers to the following questions:

• Activity: Does the prohibition cover specific products, the operating concept, or all businesses targeting the same customers?
• People and entities: Does the obligation apply only to the contracting company, or does the wording seek to extend it to owners, directors and affiliated companies?
• Location: Does it cover the area around the outlet, a city or the whole of Saudi Arabia? How does it address online sales?
• Duration: When does the restriction begin and end, and does its duration vary depending on why the agreement ends?
• Type of involvement: Does it prohibit only management and operation, or also passive investment and employment with another business?

For example, a ban on operating an identical business may have very different practical consequences from a ban on owning any stake in a business offering a similar product. This is an example for negotiation, not a judgement on the validity of either wording.

Put each element in a table alongside the current wording, its impact on you and the amendment you want. Any expression that you cannot translate into a clear practical example needs a more precise definition before you sign.

Test the restriction against your businesses and exit plan

List your existing businesses, investment holdings and management roles. Then compare them with the contract’s definition of competition. If you own an existing business that might fall within that definition, do not rely on the franchisor’s representative knowing about it. Ask for an express exception identifying the business, its activities and the limits within which it may continue operating.

Next, test three scenarios: the agreement running its full term, early termination, and choosing not to continue with the brand after expiry. In each case, ask: can I use the premises for another business? Can I put my expertise to work without using the franchisor’s secrets? Does the prohibition cover a new business that uses neither the brand’s identity nor its operating methods?

Calculate the financial impact of the restriction without relying on generic figures. Changing the business activity may require different equipment or fit-out, a period of closure, or the disposal of assets unsuitable for the new use. Include these possibilities when assessing the purchase, not as costs you will necessarily incur, but as risks that depend on the contract wording and the circumstances of your exit.

Also review how the clause interacts with the compensation and termination provisions. Do not assume that paying a specified amount automatically gives you the freedom to compete, or that the end of the contract extinguishes obligations intended to survive it.

Negotiate specific protection rather than an open-ended ban

Distinguish between keeping operational know-how confidential and agreeing not to compete. An obligation not to disclose a recipe or operating manual is not the same as a ban on carrying on any similar activity. The Implementing Regulations also address the parties’ obligations concerning confidential information and data protection. These obligations should therefore be read together, without treating them as interchangeable.

Ask for the definition of competition to be narrowed to businesses that genuinely conflict with the franchise, and for the geographical scope and duration to be clearly specified. Where appropriate, discuss exceptions for existing activities and passive investments, as well as a process for seeking written approval for future activities that identifies who must respond and within what timeframe. These are negotiating points, not automatic rights available to every franchisee.

If the franchisor agrees to an exception, include it in the agreement or a signed addendum, and check the order of precedence between documents. Do not leave it in a marketing message while the contract states that earlier correspondence does not form part of the agreement.

Practical takeaway: Before buying a franchise, ask your lawyer to test the non-compete clause against your existing businesses and your plans for life after the contract. Do not sign until you know exactly which activities are prohibited, who is bound, where the restriction applies and how long it lasts.