What to Disclose to a Prospective Franchisee Before Signing a Contract

When an owner turns an existing business into a franchise, the sales presentation usually comes before the disclosure procedures. This creates a risk: a candidate may mistake a forecast for a promise, or a list of services for an unconditional commitment. Transparency before the deal is essential to a sustainable franchise network. A practical tool is a pre-contract disclosure pack: verifiable information about the business, fees, rights and support that the prospective partner receives before signing a contract or making a payment.

1. Establish the legal framework for disclosure

Russia has no mandatory standardised franchise disclosure document and no specific, generally applicable deadline for providing one to a candidate. This does not, however, mean that disclosure is unregulated. Chapter 54 of the Russian Civil Code governs commercial concessions, the legal framework used for franchising, while Part Four governs intellectual property rights.

Article 434.1 of the Russian Civil Code requires parties to act in good faith during negotiations. Providing incomplete or inaccurate information, including failing to disclose circumstances that should be brought to the other party’s attention given the nature of the contract, may give rise to liability. Article 431.2 is also relevant where information is given as representations about circumstances. A sales presentation should therefore not be treated as legally neutral simply because it is not labelled a contract.

Include a brief legal overview in the pack. The parties to a commercial concession agreement must be commercial organisations or registered individual entrepreneurs. The agreement must be in writing; failure to meet this requirement renders it void. The bundle of exclusive rights granted must include the right to use a trade mark or service mark.

It is important to explain registration accurately: under Article 1028 of the Russian Civil Code, it is the grant of the right to use the bundle of exclusive rights that is registered with Rospatent, Russia’s intellectual property authority. Without registration, that grant is deemed not to have taken effect. This is not the same as the signed agreement automatically being invalid. State in the pack who will submit the documents, pay the official fees and monitor the outcome.

2. Compile an offer fact sheet, not another sales pitch

Appoint a staff member to check the information with the accounts team, operations team and a lawyer. Their task is to produce a single, consistent version of the offer, removing discrepancies between the presentation, the salesperson’s correspondence and the draft agreement.

Include the following sections:

• Rights holder. Name, Russian taxpayer identification number (INN), state registration number for a legal entity or individual entrepreneur (OGRN or OGRNIP), contact details and the company’s role in managing the network. If another entity receives payments, explain the basis for this arrangement.
• Trade mark. Registration number, rights holder, expiry date, and the goods and services for which use is granted. Do not present a pending application as a registered trade mark.
• Track record of the model. Which company-owned and franchised outlets are operating, which have closed or changed format, and how the pilot differs from the candidate’s proposed outlet.
• Scope of support. What training, launch assistance and ongoing support include, who provides them, and which costs the partner must pay separately.
• Restrictions. Territory, premises requirements, mandatory purchasing arrangements, approval requirements, exit terms and obligations after termination.

Do not replace specifics with phrases such as ‘full support’ or ‘protected territory’. If exclusivity depends on meeting certain conditions, list them alongside the promise, not just in a schedule to the agreement.

Identify any elements of the offer that are still under development. For example, if the owner currently delivers training personally while a learning platform is being developed, disclose the arrangements that actually exist. A development plan must not look like a service that is already available.

3. Separate actual results from forecasts

The most sensitive section concerns the financial performance of an individual outlet. Show not only an attractive result but also how it was achieved. For each table, specify the period, data source, outlet format and relevant characteristics of its location. Explain whether the figures include taxes, the manager’s remuneration, market-rate rent and costs currently borne by the owner.

Divide the financial section into three parts:

1. Actual performance. Results from operating outlets, with an explanation of which outlets are included in the sample. Do not present the best-performing outlet as typical.
2. Model assumptions. Projected customer numbers, average transaction value, capacity utilisation, payroll costs and other variables. Show which assumptions have not yet been tested in the candidate’s city.
3. Scenarios. What happens to cash flow if the launch takes longer, demand falls or costs rise.

Prepare a separate schedule of payments: the initial franchise fee, royalties, advertising contributions, software, training for additional staff and updates to branding and fit-out. For each payment, state the recipient, calculation basis, frequency, procedure for changes and applicable tax treatment of the quoted price.

If the company-owned outlet does not actually incur royalties, include them when calculating the prospective partner’s financial performance. Otherwise, you are comparing different business models. Present the payback period as the outcome of specific assumptions, not as a guarantee that the investment will be recovered.

4. Organise document delivery and updates

Provide the pack together with the draft agreement and a list of schedules. Set an internal period for review and questions, but make clear that this is a rule of your network, not a statutory waiting period. Do not press candidates to pay before they have reviewed the material terms.

Commercially sensitive information can be disclosed in stages and under a confidentiality agreement. However, confidentiality must not become a pretext for concealing costs, restrictions or material risks associated with the deal. Remove employees’ and customers’ personal data, or ensure that it is processed on an appropriate legal basis.

Record the date of dispatch, file versions and receipt of the documents. Keep a log of questions: the designated staff member should answer in writing, and material clarifications should be incorporated into the pack and the agreement. An acknowledgement of receipt must not become a waiver of the candidate’s right to bring claims over inaccurate information.

Check for changes again before signing. If fees, suppliers or the terms of trade mark use have changed, provide updated materials and allow time to assess them.

Practical takeaway: before looking for your first partner, prepare an offer fact sheet, explanatory financial notes and a document delivery procedure. Transparency helps both parties check that their expectations align before making commitments.