Sub-franchising in Russia: how to authorise a partner to develop your network

The owner of an established business can grow a franchise network not only through direct agreements, but also through a partner authorised to recruit their own franchisees. Under Russia’s commercial concession framework, this arrangement is known as a subconcession, or sub-franchising. It adds another layer of management: an intermediary with contractual authority sits between the brand owner and the business trading under the brand. Before including this option in your franchise offering, you need to establish which rights and responsibilities you can actually delegate.

1. Distinguish sub-franchising from finding franchise buyers

A partner who finds candidates and receives an introduction fee does not necessarily become a party to the arrangements governing use of the brand. If the rights holder signs the agreement with each new franchisee, that is a different model: the intermediary’s authority is documented separately, for example in an agency agreement.

Under a subconcession, the original franchisee grants other businesses the right to use all or part of the package of exclusive rights they have received, within the permitted limits. This creates a separate agreement between that franchisee and the sub-franchisee. A promise to ‘sell our franchise in the region’ is therefore too vague: it could involve very different obligations.

Before negotiations, answer three questions in writing:

• Who signs the agreement with the business that will ultimately use the brand?
• Who receives payments and is responsible for delivering the promised support?
• Who is entitled to demand that breaches are remedied and use of the brand ceases?

If the answers differ between the presentation, financial projections and draft agreements, the model is not ready to sell.

2. Set out the legal limits of the partner’s authority

Russia has no separate federal law on franchising, but commercial concessions are specifically governed by Chapter 54 of the Russian Civil Code. General rules on obligations and the intellectual property provisions in Part Four of the Civil Code also apply. Article 1029 deals with subconcessions.

The main agreement must authorise the franchisee to grant the relevant rights to others. The terms of the subconcession must either be agreed with the rights holder or set out in the main agreement. A partner’s right to use a trade mark does not, in itself, entitle them to grant that right to anyone else.

Only commercial organisations and registered individual entrepreneurs may be parties to a commercial concession. These requirements also apply to subconcessions. The 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 authority. It is the grant of rights that is registered, not the agreement as a document. Without registration, the grant of rights is deemed not to have taken effect.

A subconcession cannot last longer than the main agreement. If the main agreement is invalid, any subconcessions entered into under it are also invalid. Before each transaction, you therefore need to check not only the candidate but also the current scope of the intermediary’s authority.

3. Establish which functions the partner can perform

Sub-franchising should not become a shortcut for handing network development to someone who can sell but cannot support outlets. Check whether the partner can organise training, answer operational questions, carry out inspections and document breaches.

Draw up a table allocating responsibilities. For each task, specify who will carry it out, the deadline, the document that will confirm completion, and the process for escalating difficulties to the rights holder. For example, the partner might deliver initial training, while the brand owner approves trainers and keeps training materials up to date. The sub-franchisee must also understand whom to contact and when to expect a response.

Set out a separate process for approving new sub-franchisees. You could require the rights holder to vet every candidate in advance, or specify the criteria and documents on which the partner must base their decision. Do not leave the approval process as a verbal understanding.

The rights holder also needs lawful access to information about outlets operating under their brand. Define the reporting requirements and how information will be shared, taking account of the rules on personal data protection and confidential information.

4. Link payments to the work involved

Sub-franchising introduces an additional party into the payment flows. Before signing any documents, distinguish the rights holder’s remuneration from the partner’s income and the costs of supporting sub-franchisees.

The contractual arrangements should specify:

• who requests payment and receives the money;
• which rights and services the sub-franchisee pays for;
• how remuneration under the main agreement is calculated;
• who bears the risk of non-payment by the sub-franchisee;
• who refunds payments if an agreed service is not provided.

Do not treat the entire initial fee received by the partner as freely available income. Some of it may need to fund training and ongoing support. Check whether the partner could meet their obligations if new agreements temporarily stopped coming in. This is a better test of the model’s resilience than a sales plan alone.

5. Plan for the end of the main concession agreement

Ending the relationship with the intermediary affects businesses that may have fully complied with their own agreements. Article 1029 of the Russian Civil Code sets out specific consequences when the main agreement ends, including, in certain circumstances, the transfer of rights and obligations under the subconcession to the rights holder. This is not a blanket guarantee that every relationship will automatically continue: the grounds for ending the agreement, its terms and the rights holder’s position all matter.

Agree procedures with a lawyer in advance for notifications, the handover of agreements, financial settlements, documentation and outstanding support requests. Check whether your team could take over direct support for these sub-franchisees.

Liability also needs attention: as a general rule, the original franchisee bears subsidiary liability for harm caused to the rights holder by sub-franchisees’ actions, unless the main agreement provides otherwise. This rule should not be replaced with a vague promise to ‘take responsibility for the region’.

The practical takeaway: authorise sub-franchising only once you have clear contractual arrangements, an allocation of responsibilities and a plan for uninterrupted support. The partner should receive not just the opportunity to sign deals, but also obligations to the franchise network that they can realistically fulfil.