The growth of global trade activities has led to the emergence of franchising as a new face of international commerce, alongside the encouragement of this trade model by the World Trade Organization, which has opened the borders of all countries to welcome this type of business activity.
Given this high level of encouragement, we have observed various patterns and types of franchise agreements, such as outlets for fast food, soft drinks, clothing brands, electronics, luxury goods, and other product and service categories.
A franchise agreement is akin to an agency contract, but it is characterized by unique features that require both parties to the franchise agreement to be well-acquainted with and adhere to these characteristics.
It is worth mentioning that the franchise agreement is officially recognized and accepted in the Kingdom by relevant authorities (Ministry of Commerce) as a commercial contract (agency contract) and is currently applicable within the Kingdom.

Characteristics of the Franchise Agreement:

1. This contract is granted by the franchisor, who is the owner of the product or service, according to the other conditions outlined in the franchise agreement.
2. The franchisor must be the actual owner of the trademark granted to the franchisee; otherwise, they will not legally be able to transfer this trademark.
3. The trademark must be registered in the geographical area of the franchise at the expense of the franchisor, and this registration is considered one of the essential obligations in the franchise agreement.
4. The geographical area of the franchise must be clearly defined in the franchise agreement—whether it encompasses the entire Kingdom, a part of it, or a specific region, and whether it covers all Gulf countries or just one country in the Gulf or the Middle East.
5. The type of franchise rights granted to the franchisee must be specified—whether it is an exclusive or non-exclusive right.
6. Franchise fees (royalty): The payment of these fees must be defined – whether they are paid annually or quarterly, whether an initial franchise fee must be paid in advance, and what the amount is – ongoing franchise fees during execution are considered the backbone of the franchise, and the mechanism for paying these fees must be clearly defined to avoid any disputes arising from the payment of these fees.
7. The franchise location: This location is determined by mutual agreement of both parties, chosen based on accessibility, parking availability, and traffic considerations.
8. Training of the franchisee’s personnel: Initial training for the franchisee’s staff is conducted at the expense of the franchisor, and it is very important to include provisions for ongoing periodic training. The number of trainees for the initial and ongoing phases must be specified, as well as the technical assistance required from the franchisor.
9. The franchisor is obliged to provide drawings, specifications, maps, names of equipment used at the site, a menu, food quality, and all operational materials, as the franchise is considered a craft/operational business. Consequently, any franchise outlet of the McDonald’s brand in the Kingdom or any other location worldwide must be identical to any McDonald’s outlet in the United States or other countries.
10. Contract duration: The contract duration should be long enough to allow the franchisee to recover the investment amounts spent on this project, and the franchisee must be vigilant and cautious to be aware of events and situations that could lead to the termination of the franchise agreement.
11. Standards and operational procedures: These should be clearly defined in the franchise agreement, especially the confidential operational manual.
12. Books, records, and monitoring.
13. Tax payments.
14. Advertising and promotional campaigns and their costs.
15. Confidential information and trade secrets.
16. Termination of the contract – applicable law.
17. Compensation.
18. The franchisee’s right to subcontract.

It is important to mention here that the Saudi Fish Company (SFC), a joint-stock company, is a pioneer in the field of franchising in the Kingdom, having introduced and implemented this type of business activity in 1991. They engaged an American consultancy specializing in franchising and subsequently contracted with an American law firm (Gary, Plamtt, Mooty, and Bennti) to prepare and draft a commercial franchise agreement for the company, which culminated in the signing of a global franchise agreement.
I was part of the team that contributed to the discussion and preparation of that contract in my capacity as the legal advisor for the Fish Company (SFC) from 1991 to 2007. This was indeed a rich and fruitful experience that led to the company’s expansion into remote areas of the Kingdom (Qassim, Hail, Tabuk, Jizan) through the implementation of this system.
Additionally, I worked with Mr. Ahmed Al-Amoudi, the company’s store manager, to resolve various operational and legal issues that arose during the implementation of this system, given its novelty. Thankfully, we managed to address and overcome these challenges, successfully navigating that phase.
The franchise relationship between the two parties relies on a fundamental truth: the franchisee must have a solid financial standing and be capable of fulfilling their contractual obligations while being qualified to manage the franchise. The essence of this relationship is that the franchisor allows the franchisees to use their trademark and reputation to market the product or service subject to the franchise agreement. Therefore, ensuring these conditions places a significant burden on the franchisor to be meticulous in selecting the franchisee to avoid endangering their business and reputation or facing potential litigation in the future.