Franchises in Guatemala: check for mandatory expansion

Buying a franchise does not always mean committing to a single outlet. Some offers include an obligation to develop several outlets, even if the sales presentation focuses on the first. Before joining a franchise network in Guatemala, check whether you are buying a single-outlet business, an option to grow or an expansion commitment that will require further investment.

1. Distinguish the right to expand from the obligation to do so

Permission to open more outlets is not the same as an obligation to open them. However, terms such as ‘development plan’, ‘expansion commitment’ or ‘territory reservation’ may come with conditions that make growth a contractual requirement.

Ask for the proposal to state clearly which of these arrangements applies to your purchase:

• Single outlet: your commitment is limited to the outlet covered by the agreement.
• Expansion option: you can apply to open further outlets, but are not obliged to do so.
• Multi-unit development: you commit to additional openings under agreed conditions and deadlines.

Also ask whether future outlets are already authorised or will need further approval from the franchisor. Committing to open outlets without knowing the approval criteria would be risky.

Request a table setting out the commitment, required approvals and associated payments for each outlet. Do not allow a sales forecast for growth to become a binding commitment without explicitly reviewing it.

2. Understand Guatemala’s legal framework

Guatemala has neither a comprehensive franchise-specific law nor a general mandatory pre-contractual disclosure regime specifically for franchises. You should therefore not assume that you will automatically receive an offering circular explaining all your expansion obligations.

A franchise agreement is treated as an atypical commercial contract: a form of contract not specifically regulated as a distinct category. Its structure depends on what the parties agree within the framework of the Commercial Code, Decree 2-70, with the Civil Code, Decree-Law 106, applying on a supplementary basis. Freedom of contract does not override mandatory rules or commercial principles of good faith.

The Industrial Property Law, Decree 57-2000, governs matters such as trade mark licensing. That protection does not remove the need to agree how many outlets you may or must operate. Tax, employment and other general requirements applicable to each business must also be observed.

You should therefore instruct a Guatemalan lawyer to review the scope of the development commitment. They should check whether it appears only in the main agreement or also in binding documents incorporated into it. An additional obligation does not disappear simply because the seller describes the purchase as ‘your first franchise’.

3. Assess the full financial commitment

Looking only at the budget for the first premises can conceal the true scale of the purchase. If you sign up to mandatory development, your assessment must cover successive investments and the period during which several outlets might need funding at the same time.

Prepare a separate budget for each outlet and a consolidated timetable. Include additional initial franchise fees, fit-out costs, equipment, stock, recruitment and working capital. Do not assume that the first outlet will finance the next ones: test that possibility using cautious scenarios rather than treating it as a guaranteed outcome.

Clarify in writing:

• Whether there is a fee to reserve development rights and what you receive in return.
• Whether that amount is credited against the fees for future outlets.
• How the prices of additional franchises will be determined.
• Which payments will remain due if you decide not to proceed.
• Whether you will have to sign the agreement in force at each new opening, potentially on different terms.

A useful test is to project what would happen if the first outlet took longer than expected to become self-sustaining. If you would still have to finance another opening, you are taking on two simultaneous risks, not simply an opportunity to grow.

4. Negotiate a staged approach to expansion

Aim to make further investment dependent on a documented assessment, rather than triggering it solely through the passage of time. You can propose stages subject to objective conditions: access to finance, an approved location and sufficient management capacity.

These conditions must be negotiated; they are not automatic franchisee rights. Define who will verify that they have been met and how the decision to proceed, postpone or abandon a stage will be documented.

Pay particular attention to whether failure to meet the development commitment also allows the franchisor to terminate the franchise already in operation. Where possible, ask to separate the consequences of failing to meet expansion commitments from those affecting operating outlets. Distinguish between losing an option to expand and losing the right to continue running an existing outlet.

Practical conclusion: before signing, summarise on one page how many outlets you must open, how much you are committing financially and what happens if you do not proceed. If those answers are unclear, you do not yet understand the full scope of your purchase.