Buying a Franchise in Saudi Arabia: How to Review a Personal Guarantee

When buying a franchise in Saudi Arabia, you may find an undertaking among the appendices that requires you to sign in a personal capacity, even though your company will operate the outlet. At this point, calculating franchise fees and fit-out costs is not enough: you also need to understand what you, as the owner, could be required to pay from outside the business’s assets. This review is an important part of entering the franchise sector with clear financial boundaries, not just a formality before signing.

Distinguish between signing as a director and guaranteeing as an owner

Start by identifying every party and the capacity in which they act across all the documents. Are you signing on behalf of the company, as a guarantor of its obligations, or both? The company’s name on the first page does not determine the effect of a separate undertaking at the end of the contract, or of a document signed later with the franchisor or one of its related parties.

Look for terms such as ‘guarantor’, ‘surety’, ‘personal liability’, ‘joint and several liability’ and ‘guarantee of all obligations’. These warrant specialist review; they do not all have the same legal effect. Ask a lawyer to explain when a claim could be made against you, for how much, and whether any action must first be taken against the company, based on the wording and applicable law.

Make a single list of all documents requiring you to sign in a personal capacity:

• The franchise agreement, its appendices and any separate undertakings.
• Any guarantee required for credit facilities the franchisor provides to the company.
• Debt documents or payment-related instruments, if requested.
• Separate guarantees for a lender, landlord or supplier.

Do not assume that cancelling a guarantee in favour of the franchisor cancels one in favour of another party. Each document has its own beneficiary, scope and conditions, which should be examined separately.

Include the guarantee in your legal review of the franchise

The relationship is governed by Saudi Arabia’s Commercial Franchise Law and its Implementing Regulations. The law applies to franchise agreements performed within the Kingdom. Article 11 requires the agreement to be in writing, signed by both parties and drafted in Arabic, or accompanied by a certified Arabic translation if drafted in another language.

The law also requires the agreement to specify the payments the franchisee must make to the franchisor. The regulatory requirements further call for the parties’ rights and obligations concerning termination, and the consequences of termination or expiry, to be set out. The guarantee should therefore be read alongside the payment and termination provisions, rather than treated as administrative paperwork separate from the deal.

Article 7 requires the franchisor to provide the franchisee with a disclosure document at least 14 days before the agreement is concluded or any franchise-related payment is made, whichever comes first. Use this period to request all proposed forms of undertakings and guarantees and compare them with the obligations presented to you. Do not leave the review until the signing meeting.

The existence of franchise-specific regulation does not mean that every guarantee requested is a legal requirement you must accept. Ask the franchisor whether it is a commercial condition they impose or is based on another requirement, and request clarification. Equally, do not assume a guarantee is invalid simply because it appears in a separate document: its legal character and effect require a review of the wording and the circumstances in which it is signed.

Negotiate the amount, scope and grounds for a claim

The greatest risk in a guarantee lies not in its title but in the breadth of the obligations it covers. Wording such as ‘all current and future amounts’ may raise very different questions from a guarantee for a fixed sum tied to a defined obligation. Turn your review into questions that can be answered in writing:

• What obligation is guaranteed? Is it a specific fee, purchases on credit or all the company’s obligations?
• What is the maximum liability? Does it include damages and the costs of pursuing a claim, or are these added on top?
• When can a claim be made? What documents establish the amount owed and when it falls due?
• Is there a period allowed for payment? How will notice reach you, and at which designated address?
• Does the guarantee extend further? Does it cover new outlets, additional obligations or subsequent agreements?

For example, if the franchisor’s aim is to secure purchases on credit at opening, ask why the undertaking covers obligations unrelated to those purchases. Negotiate to tie it to that specific purpose, set a clear overall cap and establish a mechanism to reduce or end it once the relevant obligation has been paid.

These are negotiating options, not automatic rights that the other party must accept. However, a refusal to define the scope is important information when assessing the brand: its fees may be affordable while your personal exposure exceeds the level of risk you can bear.

Establish how the guarantee ends before it begins

Do not rely solely on the franchise agreement’s end date. Ask for clarification of how its expiry or termination affects the guarantee. Does the guarantee remain in place to cover amounts arising beforehand? How will those amounts be identified and quantified? What process will allow you to obtain a release or written confirmation that your obligation has ended?

Also review what happens when the debt is repaid, the agreement is renewed, the company’s ownership changes or you step down from managing the company. Do not assume that leaving a management role ends an undertaking you signed personally. If the wording makes your release conditional on providing a replacement guarantor, ask for clear acceptance criteria and a clear process for deciding whether that replacement is acceptable.

Before signing, prepare a short summary for each guarantee covering the beneficiary, the obligation guaranteed, the cap, the duration, the conditions for making a claim and the release procedure. Give this to your adviser alongside the original document, and retain the final signed version, not just the draft used during negotiations.

The practical takeaway: Do not sign a personal guarantee until you know what it covers, its financial limit, when it can be called upon and how it ends. The cost of buying a franchise is measured not only by what you pay today, but also by what you commit to bearing personally in the future.