Checking a Franchisor: Debts, Litigation and Authority to Sign

Buying a franchise brings an entrepreneur into a franchise network, but the contract is with a specific legal entity or individual entrepreneur. A well-known brand is no guarantee of that counterparty’s solvency or its representative’s authority to sign. Before transferring any money, check who is taking on the contractual obligations, what disputes they are involved in and whether the seller’s answers are backed by documents.

1. Establish exactly who you are contracting with

Ask for the company’s full legal name, taxpayer identification number (INN) and state registration number (OGRN), or the individual entrepreneur’s registration number (OGRNIP), along with a draft contract and the payment recipient’s details. Search by these identifiers, not just by name: organisations with identical names may be entirely unrelated.

Obtain an up-to-date extract from the Unified State Register of Legal Entities (EGRUL) or the Unified State Register of Individual Entrepreneurs (EGRIP) through the Federal Tax Service (FNS). For a company, check:

• its current status, including any liquidation proceedings or planned removal from the register;
• its registration date and history of changes;
• any flags indicating unreliable information;
• its authorised executives and the rules governing how they represent it;
• its members or shareholders and the available information about its corporate structure.

A recently incorporated company is not, in itself, a sign of fraud. However, if the seller claims a long trading history but your prospective counterparty was only recently established, ask which organisation previously signed the contracts and why it was replaced. The team’s experience should not automatically be treated as the legal entity’s track record.

Draw up a simple chart showing who sells the franchise, who signs the contract, who issues the invoice and who receives the money. Different parties may perform these roles, but only where there is a clear, documented basis. A request to transfer the fee to a manager’s personal bank card is a reason to pause payment until the circumstances have been clarified.

2. Check the signatory’s authority

Russia has no standalone federal franchising law, but Chapter 54 of the Russian Civil Code, ‘Commercial Concession’, specifically regulates these arrangements. Under Article 1027(3), the parties to such a contract may be commercial organisations or registered individual entrepreneurs. An individual without individual entrepreneur status cannot act in this capacity.

If an executive signs the contract, check their details against EGRUL and request evidence of their appointment. Bear in mind that the company may require several executives to act jointly. If a representative is signing, request a power of attorney: check its validity period, who signed it and the scope of the authority granted. Authority to negotiate does not necessarily include authority to enter into a contract.

Ask for confirmation of whether the transaction requires corporate approvals. This depends on the law, the company’s constitutional documents and the circumstances of the transaction, not simply on its being described as a ‘franchise’. If in doubt, have an independent lawyer review the documents.

Article 1028 of the Russian Civil Code requires a commercial concession contract to be in writing. It is the grant of the right to use the bundle of exclusive rights, rather than the contract itself, that must be registered with Rospatent, Russia’s intellectual property authority. Without this registration, the grant of rights is deemed not to have taken place. This is a separate legal check: a clean EGRUL extract is no substitute for it.

3. Review litigation, enforcement and bankruptcy records

Search for the counterparty in Russia’s commercial court case database, the Kartoteka of Arbitration Cases. Do not stop at the number of results: read the court decisions and establish the subject of each dispute, the company’s role and the outcome. A claim against a franchisor does not, by itself, prove wrongdoing, and winning a case does not always mean that the money has actually been recovered.

Look particularly for recurring issues: demands for refunds, complaints about contractual performance and suppliers pursuing unpaid debts. Several similar disputes with different partners call for a fuller explanation than an isolated commercial disagreement.

Also review:

• notices on Fedresurs, Russia’s official corporate disclosures platform, and bankruptcy information in the Unified Federal Register of Bankruptcy Information (EFRSB);
• available enforcement proceedings in the Federal Bailiff Service (FSSP) database;
• the company’s financial statements in the Federal Tax Service’s state accounting information resource, where available.

Cross-check dates and debtor identifiers. A notice of intention to file a bankruptcy petition does not mean that the company has already been declared bankrupt. Equally, an absence of records does not establish that there are no debts: public databases have limitations and are not all updated at the same time.

The purpose of reviewing financial statements here is not to calculate the payback period for a franchise outlet, but to assess the counterparty’s financial resilience. Recurring losses, shrinking assets or substantial liabilities are grounds for requesting explanations, not a verdict in themselves.

4. Request explanations and put key facts in writing

Russia has no generally mandatory, standardised pre-contractual disclosure document for franchise sellers. Send your own written request for information about material disputes, financial difficulties, changes to the corporate structure and the reasons for any discrepancies between the sales presentation and official registers.

This does not mean that negotiations fall outside the law. Article 434.1 of the Russian Civil Code requires parties to act in good faith; providing incomplete or inaccurate information may, in certain circumstances, give rise to liability. This is no substitute for your own checks and does not guarantee an automatic refund of every payment.

Ask for contact details of existing franchisees and, where possible, independently find additional outlets. Establish which legal entity is named in their contracts, whether the payment recipient has changed and whether any disputes have arisen. Treat reviews and feedback as leads for further checks, rather than as evidence in their own right.

Material statements can be recorded as representations about facts under Article 431.2 of the Russian Civil Code. Instead of saying ‘the company is reliable’, specify concrete facts, the date as at which they are accurate, any disclosed exceptions and the agreed consequences if they prove untrue. It is best to have a lawyer check the wording and whether those consequences would be enforceable.

Practical takeaway: compile a due diligence file containing register extracts, court decisions, the seller’s responses and documents confirming authority to sign. Refresh the key information before signing. If a material discrepancy remains unexplained by supporting documents, postpone payment: trust within a franchise network should rest on verifiable facts.