Buying a Sub-Franchise: How to Check the Intermediary’s Authority

A franchise may be sold by a regional partner rather than the brand owner itself. This model allows a franchise network to grow through local representatives, but adds another layer of due diligence for the buyer. You need to establish not only what the offer includes, but also whether the seller is entitled to grant you the rights and how far your future business depends on its relationship with the rights holder.

Establish who will actually enter into the agreement with you

The word ‘representative’ in a sales presentation tells you nothing about the seller’s legal role. It could be an agent who merely arranges negotiations, a representative acting under a power of attorney, or an independent franchisee authorised to grant sub-franchises. For the buyer, these are different arrangements with different risks.

If the intermediary only finds prospective buyers, you may enter into the agreement directly with the rights holder. If it signs on the rights holder’s behalf, you need to check its authority. If the partner grants rights in its own name under a franchise it has acquired, the arrangement may constitute a commercial sub-concession.

In Russia, commercial concessions — the legal framework used for franchising — are specifically governed by Chapter 54 of the Russian Civil Code, and sub-concessions by Article 1029. This provision allows a franchisee to grant others the right to use all or part of the bundle of exclusive rights it has received, provided the main agreement permits this. The terms of the sub-concession must be approved by the rights holder or set out in the main agreement.

Before discussing payment, ask the seller to confirm in writing:

• who owns the trade mark;
• who will be the other party to your agreement;
• the legal basis on which that party grants the rights;
• who is responsible to you for training, launch support and ongoing support;
• who receives the payments and which obligations those payments cover.

The payment recipient, the party signing the agreement and the brand owner may be different entities. Each such difference should have a clear, documented basis.

Check the full chain of rights

The key document for checking the intermediary’s authority is its main agreement with the rights holder. A trade mark certificate alone is not enough: it confirms the brand owner’s rights, but not the regional partner’s authority.

Request the main agreement and all amendments currently in force. If the seller will not disclose commercial terms, suggest a certified extract or a copy with financial information redacted. However, the provisions covering the scope of rights, term, territory, permission to grant sub-concessions and the conditions for doing so must remain available for review. A letter from the rights holder is useful as additional confirmation, but does not replace scrutiny of the underlying agreement.

Compare these documents with your draft agreement. Check whether the partner’s authority covers your city, outlet format, intended uses of the brand and planned operating period. If the main agreement requires separate approval for each new franchisee, obtain that approval before making any non-refundable payments.

The rules governing commercial concessions also apply to sub-concessions, unless the nature of the arrangement requires otherwise. The agreement must be in writing, and the parties must be commercial organisations or registered individual entrepreneurs. The grant of the right to use the bundle of exclusive rights must be registered with Rospatent, Russia’s intellectual property authority. Without registration, the grant of rights is deemed not to have taken effect. It is the grant of rights that is registered, not the text of the agreement.

Check that the grant of rights to the intermediary itself has been registered, and agree the procedure for registering your sub-concession. Specify who is responsible for filing the documents, paying the official fee, addressing any issues raised and providing confirmation of registration.

Compare the sub-franchise term with the term of the main agreement

Under Article 1029 of the Russian Civil Code, a commercial sub-concession cannot run for longer than the main commercial concession agreement. Any promise to grant you rights for several years must therefore be checked against the remaining term of the seller’s own authority.

Be particularly cautious about assurances that ‘the main agreement will be renewed automatically soon’. Check the renewal mechanism and any grounds on which renewal could be refused. Until renewal has been formalised or has taken effect under the agreed conditions, do not treat the additional term as secured.

To assess the offer, draw up a timeline with four dates: your proposed opening date, the end of your lease, the end of the sub-concession and the end of the main agreement. Then assess how much of your investment would remain unrecovered if you had to stop trading under the brand on the earliest relevant date.

A separate risk is that the main agreement is invalid: the law expressly provides that sub-concession agreements made under it are then also invalid. The seller’s assurances are useful, but do not in themselves remedy a defect in the chain of rights. This is why you need to check the legal basis for the grant of rights before paying, not after opening.

Agree what happens if the intermediary runs into problems

Early termination of the main agreement does not mean the buyer automatically receives a fully fledged direct franchise. Article 1029 provides a mechanism for transferring the sub-franchisor’s rights and obligations to the original rights holder, but with qualifications: the terms of the main agreement matter, and the rights holder may refuse the transfer. These rules also apply when a main agreement with no fixed term is terminated.

Ask a lawyer to check how this mechanism would work in the proposed arrangement. Where possible, obtain a written agreement involving the brand owner on how operations will continue if the intermediary’s authority ends. A promise from the intermediary alone cannot oblige the rights holder to accept you as a direct franchisee.

Your agreement should address:

• the duty to notify you of termination, amendments or legal challenges to the main agreement;
• the notification deadline and the supporting documents to be supplied;
• how payments for services not provided will be settled;
• the consequences if the promised rights cannot be granted;
• how support and operational materials will be handed over if a change of contracting party is agreed.

Do not assume that the brand owner automatically guarantees repayment of money paid to the intermediary. The grounds for any claim against each party in the chain must be assessed separately.

Practical takeaway: only buy a sub-franchise after checking the entire chain of rights. Before paying, confirm the seller’s authority, compare the terms of the agreements and set out in writing what will happen to your business if the regional partner loses the right to operate under the brand.