Is Your Expansion in Saudi Arabia a Franchise or a Trade Mark Licence?

Expanding your existing business may begin with a simple request: an investor wants to use your name and sell your products. You then ask them to follow your recipes, training and operating methods. At this point, calling the document a ‘cooperation agreement’ or a ‘trade mark licence’ is not enough. Before entering the franchise market, you need to establish the true nature of the relationship, because that determines your obligations before you offer the opportunity—not just when you sign the agreement.

Start with the substance of the relationship, not the contract’s title

Saudi Arabia’s Franchise Law defines franchising as one person granting another the right to conduct business on their own account in association with a trade mark or trade name owned by, or licensed to, the franchisor, while providing technical expertise and know-how and specifying the operating method, in return for financial or non-financial consideration. Payments for goods or services are excluded from that consideration.

Turn this definition into questions about your planned expansion:

• Will the other party operate the business on their own account, or manage a branch of your business?
• Will they use your trade mark or trade name to conduct the business?
• Will you transfer business-related know-how and expertise to them?
• Will you specify how the business must operate, rather than simply setting product specifications?
• What will you receive in return for the rights granted? Will there be any non-financial benefit?

These questions are an initial screening tool, not an automatic legal test. Write down an answer to each question, supported by documentation, then seek a legal review of the relationship as a whole. Correspondence or schedules may reveal obligations that are not apparent on the first page of the contract.

Distinguish between using a trade mark and transferring a business model

A straightforward trade mark licence grants permission to use the mark within agreed limits. A relationship that also involves operating a business associated with that mark, following methods specified by its owner and receiving the necessary expertise, requires closer examination against the definition of franchising. The presence of a trade mark alone does not determine the classification, nor does imposing standards to protect it establish, on its own, that a franchise exists.

Imagine three requests received by a Saudi confectionery business. The first comes from a shop that wants to buy and resell its products. The second comes from a business seeking a licence to use its trade mark on specified products. The third comes from an investor who wants to open a shop under the same name, using the approved recipes, service procedures, training programme and operating methods. These relationships differ in substance, even if everyone involved describes them as a ‘business partnership’.

Likewise, do not treat distribution or agency arrangements as synonymous with franchising. The law expressly excludes commercial agency agreements and contracts from its scope. However, choosing the title ‘agency agreement’ does not remove the need to establish the true nature of the relationship and which law governs it. Nor does falling outside the definition of a franchise mean that a relationship is unregulated. Depending on its substance, you may need to review trade mark or commercial agency legislation and general contract rules.

Examine consideration and obligations beyond the main contract

A common practical mistake is to assume that the absence of a charge labelled a ‘franchise fee’ rules out the law’s application. The definition also covers non-financial consideration. Conversely, not every payment a distributor makes to buy products should be treated as franchise consideration: the definition excludes payments for goods and services from the consideration it describes.

Create an internal table listing everything each party will provide, and identify the true purpose of each item:

• Rights to use the name and trade mark, and their limits.
• The know-how to be transferred and how it will be made available.
• Mandatory operating instructions and the extent of your business’s involvement in their implementation.
• Payments for products and services, listed separately from consideration for the rights granted.
• Any non-financial obligations or benefits linked to granting the right to conduct the business.

Review the table alongside the commercial proposal, negotiation correspondence, and training and operating schedules. The aim is not to rename payments to change the classification, but to clarify their nature. If the revenue model is complex, do not determine the legal classification on the basis of a single invoice or a brief accounting description.

Classify the relationship before marketing the opportunity

If the review concludes that the relationship is a franchise, comply with the Franchise Law and its Implementing Regulations before proceeding with expansion. The law applies to any franchise agreement performed within Saudi Arabia. Before an opportunity is offered or granted, Article 5 requires the business to have operated under the franchise model for at least one year, by at least two persons or at a minimum of two different outlets, subject to the article’s detailed provisions.

The disclosure document must also be delivered at least fourteen days before the franchise agreement is signed or any franchise-related consideration is paid, whichever occurs first. The agreement must be in writing in Arabic and signed by both parties, or accompanied by a certified Arabic translation if drafted in another language. The franchisor must register the agreement and disclosure document with the Ministry of Commerce within ninety days of signing the agreement.

As an internal step, approve a short memorandum setting out the nature of the relationship, the reasons for its classification and the requirements to meet before marketing it. Review it again if you later introduce mandatory training, a standardised operating method or new consideration: changes to the relationship may call for reassessment.

Practical takeaway: Before preparing your expansion proposal, bring together the rights, instructions and consideration on a single page, then have their legal classification reviewed. Start with the substance of the relationship, not your preferred title for the contract.