I. Introduction and context
At the start of 2023 we face a possible global recession and market contraction. It is no secret that the Bank of Mexico’s interest rate hikes —aligned with the U.S. Federal Reserve’s increases— have reduced appetite for risk assets such as equities. 2022 also brought crypto market turbulence, stress in real estate, the Russia-Ukraine war, labor and tax reforms in Mexico, high inflation, and many other factors shaping business and investor decisions.
In that context, a January 23, 2023 note in Forbes Mexico titled “Study foresees 10% growth in Mexico’s franchise industry” caught our attention, suggesting apparent resilience in the sector. Building on that, we consider it useful for every franchisee to know and understand the minimum legal aspects before entering into a franchise.
II. What is a franchise and how is it regulated?
Franchises are regulated under the Federal Industrial Property Protection Law (LFPPI), particularly in its provisions on trademark licenses and franchise agreements. A franchise exists when, together with a trademark license, technical know-how is transferred or technical assistance is provided so that the grantee can produce or sell goods, or render services, uniformly and under the operational, commercial, and administrative methods set by the trademark owner, aimed at preserving quality, prestige, and image.
III. Franchise Disclosure Circular
Before entering into the agreement, the franchisor must provide the prospective franchisee, at least 30 days in advance, a Franchise Disclosure Circular with relevant information on:
- Identity of the franchisor, corporate history, and business track record.
- Intellectual property rights involved (trademarks, patents, trade secrets, licenses).
- Amounts and concepts of initial payments, royalties, and advertising fund contributions.
- Types of technical assistance and services the franchisor will provide.
- Definition of the territorial operating area.
- Confidentiality and non-compete obligations.
- Criteria and methods for determining profit margins and commissions.
- List of previously granted franchises.
Omissions or misstatements in the disclosure circular may lead to nullity of the agreement and claims for damages.
IV. Critical clauses of the franchise agreement
- Scope: a clear description of the licensed trademark, transferred know-how, territory, and type of franchise (traditional, master, multi-unit).
- Term and renewal: initial term, renewal conditions, grounds for early termination, and consequences of termination.
- Consideration: initial fee, royalties (on gross sales, net sales, or per customer), advertising fund contributions, payment terms, and adjustment mechanisms.
- Operating standards: manuals, approved suppliers, quality control, brand identity, and audit schemes.
- Training and technical assistance: initial and ongoing scope, associated costs, and materials provided.
- Confidentiality and trade secrets: protection of know-how, duration of the confidentiality obligation, and consequences of breach.
- Non-compete: during the term and after termination, within reasonable limits of time, territory, and activity.
- Assignment and change of control: conditions for transferring the franchise, right of first refusal of the franchisor, and approval requirements.
- Dispute resolution: jurisdiction or arbitration clauses; prior mediation; governing law.
V. Registration with IMPI
Although a franchise agreement may exist and produce effects between the parties without registration, its filing with IMPI is advisable and, in certain cases, necessary for enforceability against third parties and for tax aspects (royalty deductibility).
VI. Tax considerations
Royalties paid to the franchisor may be subject to income-tax withholding under Mexican law and, where applicable, under double-taxation treaties. VAT crediting must also be reviewed, and for cross-border transactions, the transfer-pricing regime. A careful tax design at the outset prevents future friction with the tax authority.
VII. Conclusion
A franchise is a complex contractual vehicle combining trademark law, know-how transfer, commercial regulation, and tax aspects. For the franchisee, pre-signing diligence —reviewing the disclosure circular, analyzing the trademark, validating financial projections, and negotiating critical clauses— is the main factor of success or failure. In an economic environment like 2023, timely advice can make the difference between a profitable business and a costly contingency.