Setting Initial Franchise Fees in Saudi Arabia: A Franchisor’s Guide

When turning an established business into a franchise in Saudi Arabia, setting the initial fee may seem like the simplest expansion decision: check what other brands charge and choose a similar amount. Yet this approach can leave the franchisor unable to cover its commitments, or the franchisee paying for something they do not fully understand. Sound pricing starts with defining what the franchisor will actually deliver, calculating its cost and documenting its limits. This helps establish clear relationships across the franchise network.

Define what the franchisee gets for the initial fee

Here, the initial fee means the amount agreed for granting the franchise at the start of the relationship, not the total investment needed to open the outlet. It should not be confused with fit-out, stock or licensing costs, or with ongoing fees payable during operation.

Start by preparing an internal summary of the services and rights the fee will cover. These might include access to the business model and know-how, agreed initial training, a review of outlet plans and support in preparing for launch. These are examples to help you design your package, not a fixed statutory checklist that applies to every brand.

For each item, specify what the franchisee will receive. Does training cover a set number of employees? Is opening support provided on site or remotely? Does the design review include several rounds of revisions, or is its scope otherwise defined? The more general the description, the greater the risk of differing expectations about what the fee buys.

Use three clear categories:

• Included in the initial fee, within a defined scope.
• An optional service, charged separately and subject to prior approval.
• An expense paid directly by the franchisee to a third party.

Do not include an item in the initial fee and then charge for it again under a different name. If travel or accommodation expenses are charged separately, make clear who pays them rather than leaving the issue to last-minute negotiations.

Calculate the cost of granting a franchise before setting the price

Identify the time and resources needed to deliver the package you have promised. Ask those responsible for operations, training, design and support to estimate the actual working hours required for each task, then calculate staff and supplier costs and associated expenses. Do not treat the founder’s time as free: expansion requires a repeatable delivery capability, not permanent reliance on their personal efforts.

Separate three types of cost in your calculations:

• Direct costs for each franchise: such as team training and pre-opening visits.
• Shared set-up costs: such as developing franchising tools, an appropriate share of which can be allocated using realistic assumptions.
• Ongoing support costs: these should be funded through the recurring revenue model, rather than assuming the initial fee will cover them indefinitely.

Next, test your calculations against two operational scenarios: an opening that goes to plan, and one that requires a reasonable amount of additional work. The aim is not to pass every franchisor risk on to the franchisee, but to identify open-ended commitments that are difficult to price.

Review your assumptions about the number of new agreements, too. Spreading set-up costs across an optimistic number of franchise awards can make the fee look profitable only on paper. Comparing fees with other brands is useful later to understand the market, but it is no substitute for knowing the cost of your own package and how its contents differ.

Turn the price into clear contractual terms

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

The article also requires the agreement to state the amounts the franchisee must pay the franchisor. These include franchise fees, training fees where applicable, technical support fees, and the method for calculating amounts payable for goods or services supplied by the franchisor or anyone within its group. Simply stating a total figure without explaining what it includes and excludes is therefore not enough.

Document the fee amount, when it is due, the services included, how additional services will be handled and the applicable tax treatment, after reviewing this with a specialist. If payment is split into instalments, distinguish payment dates from service delivery dates: even where they coincide, they may have different contractual implications.

The franchisor must provide the disclosure document at least fourteen days before the agreement is signed or any franchise-related payment is made, whichever occurs first. Do not collect the fee before this disclosure period has elapsed, or treat a verbal explanation of the price as a substitute for the required disclosure. Refund terms and the consequences of failing to fulfil obligations need legal drafting that takes the law into account, rather than a blanket statement that all fees are non-refundable.

Test the fee and adopt a policy for exceptions

Before approving the price, ask your operations lead, accountant and legal adviser to review the package. Put three questions to them: Can we deliver what we promise? Does the price cover the cost on reasonable assumptions? Can an applicant understand their financial commitment without further explanation?

Then establish an internal policy for discounts and exceptions, specifying who can approve them, the reason for each exception and whether it affects the scope of services. Do not reduce the fee while leaving the operations team expected to deliver a package without adequate resources. Equally, do not reduce the services without clear documentation accepted by both parties.

After each opening, compare actual costs with estimates to refine pricing for future offers. Do not assume you have the right to change fees already agreed in existing contracts.

Practical takeaway: Do not start with a figure. Start with a defined package, calculate the cost of delivering it, then document the price and its scope, and observe the disclosure period before collecting payment. A well-set fee is one you can explain clearly while delivering everything you have promised.