Franchise Disclosure: What to Tell Prospective Franchisees

Before selling their first franchise, owners of an established business should prepare not just a presentation, but also verifiable information for prospective franchisees. This helps distinguish what has already been demonstrated by company-owned outlets from what remains an assumption. Such transparency is fundamental to trust within the franchising community. Here is how to organise pre-contract disclosure without turning it into either a sales promise or an uncontrolled release of business secrets.

What Russian law requires

Russia has no mandatory standard format for pre-contract franchise disclosure, nor a statutory deadline for providing it to a prospective franchisee. This does not, however, mean that the seller may provide inaccurate information or withhold circumstances material to the decision to buy.

Chapter 54 of the Russian Civil Code specifically regulates commercial concession arrangements, the legal framework used for franchising in Russia. General provisions of civil law also apply. In particular, Article 434.1 of the Civil Code requires parties to negotiate in good faith: providing incomplete or inaccurate information, including withholding circumstances that should be disclosed to the other party given the nature of the agreement, may indicate bad faith. Where the statutory grounds are met, this gives rise to liability for damages.

If information is presented as representations about factual circumstances, Article 431.2 of the Civil Code is also relevant: inaccurate representations can have separate legal consequences. Statements such as ‘all outlets are profitable’ or ‘all rights to the brand are fully secured’ should therefore not be treated as harmless presentation wording.

It is also important to distinguish disclosure from the formal grant of rights. Under Article 1028 of the Civil Code, a commercial concession agreement must be in writing, and the grant of the right to use the package of exclusive rights must be registered with Rospatent, Russia’s intellectual property office. Without registration, the rights are deemed not to have been granted. Giving a prospective franchisee a presentation or a trade mark certificate does not replace this procedure.

What information to prepare before proposing a deal

Prepare a separate information statement setting out the offer. This is not a mandatory government-prescribed document, but an internal tool for transparent selling. Include the date of preparation and identify who is responsible for keeping the information up to date.

A practical statement should cover:

• Who is offering the franchise. State the rights holder’s name, registration details and relationship to the operating business. If one company owns the outlets while another offers the agreement, explain their respective roles.
• What experience is substantiated. Explain when the business began trading, which formats are actually operating and whether there are any independent franchisees. If only company-owned outlets are operating, say so explicitly.
• What is known about the network. Distinguish company-owned outlets from franchised outlets, and operating locations from those merely planned. If you describe the network’s development, do not omit closures that materially change the picture.
• What rights are being offered. Identify the trade mark, its owner, and the goods and services it covers. An application for registration must not be presented as an already registered trade mark.
• What commitments will be required. List fees, compulsory purchases, software and equipment costs, and the owner’s required involvement in management. Specify what must be paid for separately.
• What significant restrictions apply. These might include requirements relating to premises, product range, operating territory or the use of suppliers.

For each material claim, identify supporting evidence: registration details, a management report, a current fee schedule or a specific clause in the draft agreement. If there is no supporting evidence, revise the wording or remove the claim.

How to present results without promising returns

The main task is not to recalculate the financial model, but to explain where the figures come from. Prospective franchisees need to understand which figures are actual results, which are modelled scenarios and which are growth targets.

When disclosing an operating outlet’s results, state the period, format, stage of development and conditions affecting comparability. The revenue of an established outlet with a steady flow of customers does not automatically reflect a new franchisee’s first few months. The best month should not be presented as a typical result.

Explain which expenses are included. Do the figures account for a manager’s remuneration, taxes, rent, marketing and equipment maintenance? If a company-owned outlet does not pay royalties, its profit cannot be presented without explanation as the profit a franchisee should expect.

Use clear labels:

• ‘Actual figures for a company-owned outlet over the stated period’.
• ‘Modelled scenario for a new outlet based on the listed assumptions’.
• ‘Target figure not yet substantiated by franchisees’ operating results’.

A disclaimer that ‘results are not guaranteed’ is useful, but it does not correct inaccurate underlying data. Do not hide material conditions in the small print: place them alongside the relevant figure. If there is no operating track record from independent franchisees, make this clear within the description of the results themselves.

How to establish a safe disclosure process

Divide information into access levels. Prospective franchisees should receive the key details of the offer, rights, fees and restrictions before making their decision. Detailed financial information can be provided after initial discussions. Sensitive technical and operational information should be shared only once confidentiality arrangements have been agreed, and only to the extent necessary.

Confidentiality must not become an excuse for concealing material risks. Rather than handing over customer databases or employees’ personal data, use anonymised reports and aggregated figures.

Establish an internal rule: prospective franchisees receive the current information statement and draft agreement sufficiently in advance, with reasonable time to review them and ask questions. This is a voluntary working practice, not a statutory waiting period. Keep a record of the document versions, the date they were sent and answers to material questions. An acknowledgement of receipt records that information was provided, but does not remove responsibility for its accuracy.

Before signing, check whether fees, trade mark rights or other material circumstances have changed. If they have, update the information and explicitly tell the prospective franchisee what has changed.

Practical takeaway: before your first franchise sale, prepare a dated information statement, support key claims with documentary evidence and distinguish results from forecasts. Transparent disclosure helps prospective franchisees make an informed decision and business owners build lasting partnerships.