What Are the Types Of Franchise Arrangements?

What are the types of franchise agreements? Franchising is a commercial contract that allows the company or person who owns the franchise to provide a specific product or service according to a certain system in a limited geographical area. Usually, companies grant franchises to subsidiary companies or individuals who wish to expand the scope of their work and benefit from The brand, experience, and support provided by the franchisor.

What Are The Types of Franchise? 

Many different types are related to franchising, which can be summarized as follows:

• Product Franchise: Related to permitting the use of a brand and distribution of products produced by the franchisor. Product franchising requires products to meet specific standards and maintain the franchisor’s quality.
• Service Franchise: gives the right to use the brand and provide services provided by the parent company, including technical services, consulting, training, maintenance, etc.
• Manufacturing Franchise: This relates to permitting the use of the franchisor’s production technologies, processes, and equipment. This can include providing raw materials, process training, and production guidance.
• Subunit Franchise: Allows individuals or companies to open and operate a subunit using the franchisor’s brand identity and operational system.

Types of Franchise Contracts in Saudi Arabia

There are many types of franchises operating in Saudi Arabia. It varies to suit the specific nature of the commercial activity. However, there are many types of franchise agreements including the following:

• Manufacturing Franchise.
• Distribution Franchise.
• Commercial Franchise.
• Services Franchise.
• Investment Franchise.

Franchise characteristics

While exploring the types of franchising, let’s also talk about its characteristics. A franchise is an agreement that grants a person or company exclusive rights to use a specific product, brand, or technology for a specific duration. Here are some of the main characteristics of a franchise:

Exclusive Rights

A franchise grants its owner exclusive rights to use the product, brand, or technology. This means it prevents granting similar rights to other parties in the same region during the franchise period.

Franchise Duration

A franchise agreement sets a specific period for the validity of exclusive rights. The period of the franchise can be a few years, and sometimes it is long-term, such as decades for multiple contracts.

Fees and Returns

The franchisor and franchisee agree upon a certain fee the franchisee pays to obtain the franchise. These fees may include initial entitlement fees and periodic payments, in addition to a share of the revenues generated by the franchisee.

Definition of Franchise

Within the framework of the franchise agreement, the franchisee is granted exclusive rights to use, market, and distribute the product, brand, or technology. Designated in the designated territory, the franchisor retains intellectual property rights and general control over the product, brand, or technology.

Franchise in Saudi Law

In Saudi Law, there are several regulations and laws controlling franchise contracts and protecting the rights of the participating parties. The following is an overview of some legal texts relating to franchises in Saudi law:

• Industrial Property Rights System: This system regulates intellectual property rights in Saudi Arabia, including brands, patents, copyrights, trade names, etc., and some franchise agreements can be related to industrial property rights.
• Commerce Approach: The commerce system contains some provisions on trade and commercial contracts and can be used to regulate certain aspects of commercial franchise agreements.
• Competition System: The competition system aims to regulate business activity, combat market monopoly, and can have an impact on some franchise contracts that relate to distribution, marketing, and prevention of unfair competition.

Learn more about Franchise Law In Saudi Arabia.

Types of Franchise Arrangements

As we mentioned before, there are several types of franchises that a person or company can obtain, let’s take a better look at what each type of franchise means:

• Distribution Franchise: relates to granting exclusive rights to a company or individual to distribute and market a particular product in a specific geographical area, which may include the brand’s use rights and the franchisor’s technical support.
• Service Franchise: It grants rights to provide certain services under the name of the franchisor’s brand, operational system, training, and technical support from the franchisor, including areas such as hotels, restaurants, logistics, insurance, etc.
• Manufacturing Franchise: Includes granting rights to use manufacturing techniques, processes, and intellectual property to a particular company or product, and allows the franchisee to produce and manufacture the product based on the criteria and quality specified by the donor company.
• Education Franchise: It grants rights to use the educational system, programs, and the brand of a particular educational institution, which may include kindergartens, private schools, educational centers, and others.

Franchise Pros and Cons

The franchise has pros and cons that one should consider when evaluating investing in this type of commercial contract. 

Advantages of Franchising

• Leveraging the well-known brand: The franchise allows the franchisee to benefit from the reputation and reputation of the well-known and proven brand in the market, enabling them to reach a broad audience and build consumer confidence.
• Technical support and training: Franchises usually include technical support and training from the franchisor, helping the franchisee acquire the knowledge and skills needed to operate the business efficiently according to specific criteria.
• Working with a proven operational system: The franchise is characterized by a specific and previously tested operational system, making it easier for the franchisee to carry out operations effectively and productively.
• Scalable business: A franchise can provide economic benefits in terms of pooled purchasing, co-costs, and co-marketing, helping to achieve greater profitability.

Disadvantages of Franchise

• Dependency on the franchisor: The franchisee depends on the franchisor in matters like brand, technical support, and training, and therefore any changes in the franchisor’s policy may affect the franchisee’s business.
• Restrictions on commercial autonomy: franchise agreements may impose restrictions on the franchisee’s freedom to make independent business decisions, as he needs to comply with the standards and policies of the donor company.
• Financial costs: The franchise may require the payment of a franchise fee and a percentage of revenue to the franchisor, as well as the costs of incorporation, operation, and marketing, thus placing an additional financial burden on the beneficiary.
• Geographical area limitations: A specific geographical area to which the franchisee must comply may be defined in the franchise agreement, thus restricting the franchisee’s freedom to expand and grow in other regions.

Learn more details about Franchising in the Middle East.