Managing Pre-Contract Franchise Reservation Payments in Saudi Arabia

An established business may ask for a payment to reserve a franchise opportunity before signing the agreement, as a way of confirming a candidate’s commitment. But this is not simply a marketing step: the timing of the payment and the obligations attached to it may have legal and contractual consequences. To protect trust within the franchise community, franchisors need a clear policy that prevents premature collection and determines what happens to the money if negotiations fall through.

Understand the rules before creating a payment link

Saudi Arabia’s Franchise Law and its Implementing Regulations govern the relationship, and the law applies to any franchise agreement performed within the Kingdom. One requirement is to provide the prospective franchisee with a disclosure document at least fourteen days before the franchise agreement is concluded or any payment relating to the franchise is made, whichever comes first.

Delaying signature of the agreement is therefore not enough if the business will receive money beforehand. In practice, do not assume that calling a payment an ‘opportunity reservation’ or a ‘confirmation of commitment’, or describing it as refundable, puts it outside this rule. Have your legal adviser assess the nature and purpose of the payment before introducing it.

Another rule applies even before this stage: under Article 5, a franchise opportunity may not be offered or granted until the business model has been operated for at least one year by at least two persons or at two different outlets. Do not use reservations to collect money for an opportunity that does not yet meet the conditions for being offered.

Design a process that does not start with payment

Separate the registration of a candidate’s interest from requests for money. Your expansion team can collect initial details, explain the assessment process and arrange meetings without making payment a condition of moving to each next step. Make the decision to collect money a documented approval, rather than leaving it to a salesperson’s judgement.

The internal process could be organised as follows:

• Register the candidate’s interest without making a firm promise to grant the franchise.
• Carry out an initial assessment and identify the entity that will actually enter into the contract.
• Deliver the disclosure document and retain dated evidence of delivery.
• Allow sufficient time for review and questions, observing the statutory waiting period.
• Approve the payment request after reviewing its timing and the document governing it.

These steps are a recommended organisational approach, not a prescribed mandatory procedure. Their value is that the accountant relies on a file demonstrating that collection may proceed, rather than a statement that ‘the candidate has agreed’. If the proposed contracting entity changes, do not automatically transfer payment approval to it. Check again that the disclosure requirements have been met for the relevant party.

Define exactly what the payment reserves

Before requesting any money, set out precisely what the candidate receives in return. Will the franchisor temporarily stop negotiating with others over a particular opportunity? Or will the payment later be credited towards the franchise fee? Avoid vague descriptions that imply a guaranteed franchise award or approval of a site that has not yet been assessed.

Following legal review, the document governing the payment should address:

• The amount, the recipient and its specific purpose.
• The reservation period and what happens if it expires without an agreement.
• Refund conditions if the candidate withdraws or the franchisor rejects the application.
• The consequences if the site is not approved or the project requirements cannot be met.
• How the payment will be credited towards sums due under the agreement when it is signed.
• The procedure for requesting a refund and the agreed timeframe for making it.

Do not use the words ‘non-refundable’ as a substitute for explaining the obligations and the grounds for retaining the money. Nor should you assume that a document headed ‘Reservation’ falls outside the scope of a franchise agreement regardless of its contents. Its substance and obligations require legal assessment, particularly if they include operating rights or definitive commitments.

Link sales authority to financial controls

A sound policy can still be undermined by day-to-day practice. Prevent payment links from being sent automatically when someone completes an expression-of-interest form, and make payment requests subject to approval by a designated person. Record the disclosure delivery date and the earliest permitted payment date established by the approved review, rather than leaving the calculation to memory or scattered conversations.

It is also useful to adopt a standard message explaining to candidates that payment is not required to bypass the review period and that a reservation does not necessarily mean final approval. Do not let pressure to meet targets justify exempting a candidate who wants to move quickly from the process.

Keep a file for each payment containing the reservation document, evidence of delivery, approvals, the payment receipt and any refund-related correspondence. Work with the accountant to determine the appropriate accounting treatment for the nature of the payment. Receiving money does not automatically mean it can be recognised as earned revenue or retained if negotiations end.

Test what happens if the process stops before accepting money

Test the policy against realistic scenarios: a candidate who pays and then withdraws, another whose application the franchisor rejects, and a third whose reservation expires before an agreement is reached. In each case, ask: who decides what happens to the money? Which document supports that decision? And how is the candidate informed?

If money is collected prematurely by mistake, do not alter dates or create backdated evidence of delivery. Pause subsequent steps and seek a documented legal remedy. Do not assume that refunding the payment alone resolves every consequence of the breach.

Practical takeaway: Do not start by asking, ‘How much should we charge for a reservation?’ Instead, ask: are we allowed to collect payment now, what are we committing to in return, and how will we refund the money if the relationship does not proceed? Formally approve the answers in writing before enabling any payment method.