Organising Your Supply Chain Before Granting a Franchise in Saudi Arabia

Your existing business may succeed because you know the supplier personally, track shipments yourself and receive concessions that never appear on an invoice. But these advantages do not automatically transfer to a franchisee. Before expanding into Saudi Arabia’s franchise market, you need supply arrangements that an independent operator can rely on, with clear costs and defined responsibilities. This guide focuses on putting those arrangements in place before granting a franchise, rather than writing an operations manual or setting initial franchise fees.

1. Decide what must be standardised and what can be bought locally

Start with a list of the products, materials and equipment your business relies on, then classify them according to their impact on brand identity and the quality of the customer experience. Do not require an outlet to buy everything from a single supplier simply because that is how your existing outlets operate.

You can divide the list into three practical categories:

• Brand-specific items: These might include a signature blend or exclusively designed packaging, and may need to be purchased from the franchisor or a designated supplier.
• Items subject to quality standards: These can be sourced from several suppliers, provided they meet specifications that can be checked.
• General items: These might include certain office and cleaning supplies, which can be purchased locally subject to appropriate requirements.

For each restricted item, record the reason for the restriction: product safety, consistent quality or protection of know-how. Then define the required specification, the process for accepting an alternative and who is authorised to approve it. If you cannot explain the operational need for a restriction, reconsider it before making it a contractual obligation.

This classification protects brand consistency while avoiding unnecessary shipping costs for goods available near the franchisee’s outlet.

2. Check whether suppliers can serve independent franchisees

A supplier capable of serving two outlets you own may not be ready to deal with several independent businesses, each with a separate account, invoice and delivery address. So do not simply ask about production capacity; test how the supplier would manage this new relationship.

Request a written quotation setting out delivery coverage, delivery schedules, minimum order quantities, payment terms and the returns policy. Also check whether the supplier can invoice each buyer separately, handle complaints and notify outlets of shortages or delayed shipments.

Create a brief supplier scorecard covering:

• Compliance with material specifications and relevant licensing requirements, depending on the business activity.
• Capacity to meet normal demand and seasonal increases.
• Handling of damaged or non-compliant materials.
• Availability of an approved alternative if supply becomes unavailable.

Do not assume that your current purchasing discount is guaranteed for future outlets. Obtain written confirmation of who qualifies, the conditions for retaining it and whether it depends on combined purchases across the network or purchases by each individual outlet.

3. Calculate the actual cost of delivery to the outlet

The supplier’s price is not the final cost. Transport, refrigeration, storage and insurance may all add to it. Costs may also rise because of spoilage or a minimum order quantity that exceeds an outlet’s needs. These details directly affect whether your model can expand beyond its current location.

Prepare a landed-cost model for a typical order delivered to a target location, using actual quotations. Separate the cost of the goods from other charges, and clarify the appropriate tax treatment with your accountant. Then assess the impact of changes in order size, distance and delivery frequency.

Ask specifically: will the franchisee need to hold more stock because deliveries are slow? Will the payment terms require purchases to be funded before sales revenue comes in? The unit price may look low while the purchasing arrangements put a strain on cash flow.

If you intend to sell materials to franchisees, clarify your role as seller and set out the invoicing, payment and returns terms. Disclose any supplier-related interests or benefits that must be disclosed under applicable legal requirements, rather than leaving the franchisee to discover them after signing.

4. Align the commercial arrangements with the agreement and disclosure document

Franchise relationships in Saudi Arabia are governed by the Commercial Franchise Law, issued under Royal Decree No. M/22 dated 9/2/1441 AH, and its Implementing Regulations. Among the franchisor’s obligations, the law addresses identifying the franchise goods or services that the franchisee must obtain from the franchisor or another party, unless the parties agree otherwise in writing.

Arrange a legal review to align the supply terms in the agreement with the relevant information in the disclosure document. The disclosure document must be provided at least 14 days before the agreement is signed or the franchisee pays any franchise-related consideration, whichever occurs first. Key purchasing terms should not come as a surprise after a financial commitment has been made.

The contract should specify who sells the goods, who ships them, when responsibility for them transfers, how defects are handled and how prices and suppliers may be changed. Distinguish between requiring a franchisee to purchase from an approved supplier and the franchisor undertaking to guarantee supply: these are different obligations.

Do not assume that including an exclusive purchasing requirement in a franchise agreement automatically exempts it from the Competition Law. Have a specialist review the restrictions in light of the relationship and market conditions.

5. Establish a clear process for supply disruptions

Put a short procedure in place identifying who receives reports of supply disruptions, who approves an alternative supplier and how substitute materials are checked before use. Distinguish between materials that can be safely substituted and those whose absence requires sales of a particular product to be suspended temporarily.

Also agree on a process for notifying outlets of defective batches, isolating and tracing them, and recalling them when necessary, in line with the requirements applicable to the business activity. Record the duration of any exceptional approval so that a temporary solution does not become a permanent difference between outlets.

Practical takeaway: Before granting a franchise, prepare your list of restricted purchases, written supplier quotations, landed-cost model and alternative supply process. Then check that they align with the agreement and disclosure document. Clear supply arrangements protect brand quality and trust across the franchise network.