Buying a Franchise in Saudi Arabia: How to Review Ongoing Franchise Fees

Ongoing franchise fees may seem straightforward when the franchisor quotes them as a percentage of sales, but the actual cost depends on how sales are defined and calculated, and when payment falls due. When buying a franchise in Saudi Arabia, do not just ask, ‘What is the percentage?’ Ask, ‘What amount does it apply to?’ Checking this helps you enter the franchise sector with an agreement you understand, and prevents a small accounting difference from becoming a recurring liability throughout the contract term.

1. Start with the definition of sales, not the fee percentage

Ask for the full wording of the clause defining the sales on which fees are charged. An agreement may use the term ‘gross sales’ without specifying whether it means amounts invoiced, payments received or sales recorded in the point-of-sale system. Each definition has different implications, particularly where returns, credit sales or orders through delivery apps are involved.

Turn the definition into a checklist of scenarios, and request a written answer for each:

• VAT: Is it explicitly excluded from the fee calculation base? Do not assume it is excluded simply because it is not operating revenue for your business.
• Discounts: Are fees calculated on the price before the discount or the amount the customer paid? Who bears the difference for promotions required by the franchisor?
• Cancellations and returns: When are they deducted, and what supporting documents are required?
• Delivery commissions: Is the calculation based on the order value before the app’s commission, or the net amount transferred to you?
• Vouchers and gift cards: Are they counted when sold or redeemed, and how is double counting prevented?

There is no single commercial answer that suits every brand. What matters is that you understand the rule and can apply it to your outlet’s data, rather than relying on a verbal explanation that does not appear in the agreement.

2. Test the clause with a sample reconciliation statement

Before signing, ask the franchisor for a sample monthly fee calculation statement, then recreate it with your accountant using clearly defined hypothetical transactions. Include a standard sale, a delivery order, a discount, a cancellation and a refund relating to a previous month. This is not a profit forecast; it is a way to test whether the clause works in practice.

The statement should show recorded sales, permitted exclusions, the final calculation base, the percentage applied, any minimum fee and the amount payable. Distinguish between the tax included in customer invoices and the tax treatment of the franchisor’s fee invoice. These are separate matters, and their treatment should be checked with a tax specialist in light of each party’s circumstances.

Also ask about sales recorded today for which payment is received later. If fees become due when a sale is recorded but the delivery app has not yet transferred the money, you are paying before receiving the cash. That does not necessarily mean rejecting the opportunity, but it is an obligation whose timing you should understand and negotiate.

Ask which records take precedence if the app’s report differs from the point-of-sale records or bank statement. An agreed data source and a process for reconciling discrepancies are more useful than a general statement such as ‘the franchisor’s records shall be final’.

3. Check minimum fees, tiered rates and the right to change fees

The percentage may look attractive while the agreement includes a minimum monthly fee payable even when sales fall. Check whether you pay the higher of the percentage-based fee and the minimum, or both together. Review when fees first become due: on signing the agreement, on opening, or on a specified date even if trading is delayed?

Also check what happens during a temporary closure for maintenance, a system outage or delays in obtaining approvals. Do not assume that fees stop when sales stop. Ask for foreseeable situations to be addressed explicitly, including the conditions and duration of any waiver or reduction.

If fees are tiered, ask whether a new rate applies to all sales for the period or only to the portion above the relevant threshold. If there is an initial fee waiver, establish whether the fees are permanently waived or merely deferred and accumulated for later payment.

Review any fee-change clause alongside all references to schedules and the operations manual. Ask for the amendment process, its scope and the approval procedure to be clearly set out, and ensure that the calculation base cannot effectively be changed by adding new amounts to the definition of sales. Compare brands using the fee cost for the same hypothetical transactions, not just the advertised percentage.

4. Document the agreement and review rights under Saudi law

Franchising in Saudi Arabia is governed by the Commercial Franchise Law, issued under Royal Decree No. M/22, and its Implementing Regulations. The law applies to franchise agreements performed within the Kingdom. Among its requirements, the agreement must specify the financial consideration payable by the franchisee to the franchisor, including how consideration relating to the franchise business is calculated.

The franchisor must provide you with a disclosure document at least 14 days before you enter into the agreement or pay any franchise-related consideration, whichever comes first. Use this period to check that the fees in the disclosure document match those in the agreement and its schedules. Disclosing that a fee exists does not remove the need for a clear contractual explanation of how it is calculated.

Negotiate a written procedure for disputing statements, correcting errors, carrying forward credit balances and reconciling late returns. If the franchisor is given the right to audit sales, define the scope of access, data confidentiality, and who pays for the audit and under what circumstances. These are matters for negotiation and legal review; they are not all automatic rights granted by the legislation itself.

The practical takeaway: Do not sign until you, your accountant and the franchisor can arrive at the same amount using a single sales statement. Attach an agreed worked example to the contract, and make any remaining ambiguity a negotiating point rather than a problem postponed until the first invoice.