Franchises in Guatemala: review the letter of intent

A letter of intent can provide a framework for buying a franchise, but it can also impose obligations before the final agreement is signed. If you are considering entering Guatemala’s franchise market, do not treat it as a mere formality to keep discussions moving. What matters is not the document’s title, but what it requires, for how long and with what consequences if you decide not to buy.

1. Distinguish an intention to negotiate from an obligation to buy

A letter of intent usually sets out the preliminary basis of a transaction: the brand, business format, proposed location and next steps. It may also be called a memorandum of understanding or a preliminary agreement. None of these names, in itself, guarantees that the document has no binding effect.

Before signing, place each provision in one of these categories:

• Indicative terms: commercial terms that remain subject to review and negotiation.
• Obligations during discussions: tasks, deadlines or restrictions that take effect on signing.
• Commitments to enter into a contract: provisions that could require you to sign the agreement later or have consequences if you do not.

Pay particular attention to phrases such as ‘the parties undertake to enter into a contract’, ‘irrevocable acceptance’ or ‘terms definitively agreed’. These are not equivalent to expressing an interest in considering a proposal.

Ask for the text to state expressly which sections are intended to be binding and which are not. If you intend to keep your decision to buy open, ask for this to be recorded, subject to your assessment of the business and acceptance of the final agreement. A lawyer should check that the rest of the document does not contradict that reservation.

2. Limit exclusivity during negotiations

The franchisor may ask you not to consider other franchises while negotiations are ongoing. This negotiating exclusivity is different from territorial exclusivity: it does not protect a trading area, but restricts your alternatives during the buying process.

Before accepting it, ask what you will receive in return. A one-sided restriction could leave you without alternatives while the franchisor continues looking for candidates for the same opportunity.

It is worth specifying:

• Which brands, formats or projects the restriction covers.
• When it begins and ends, with no ambiguous renewal provisions.
• Whether the franchisor also undertakes to reserve the opportunity under negotiation for you.
• Which steps each party must complete during that period.
• How the restriction ends if negotiations stall.

Avoid broad prohibitions on ‘participating in similar businesses’ when you are only assessing a particular outlet. Also ask whether you can continue discussions already under way and consult independent advisers.

Exclusivity should be accompanied by measurable progress, rather than simply tying the prospective franchisee’s hands. For example, you could agree dates for providing the draft agreement and responding to legal comments, without those milestones amounting to acceptance of the purchase.

3. Define costs and how to end negotiations

Even if there is no obligation to buy, separate financial obligations may still apply. A letter may make you responsible for the costs of visits, location studies, travel or document preparation, even if the franchise agreement is never concluded.

Distinguish each party’s own expenses from work that one party will commission at the other’s expense. For the latter, agree on prior written authorisation, the scope of the work, a budget and supporting documentation. Do not accept an open-ended obligation to reimburse ‘all costs incurred’ without specifying what those costs are and who can approve them.

Also establish a straightforward process for ending discussions: who must receive notice, how it must be sent and when it takes effect. Check whether any penalties, agreed compensation or expenses become payable if you withdraw; do not assume they will fall away because the final agreement was never signed.

The expiry provisions should state which obligations end and which survive, for how long and to what extent. Keep the signed version and any notices sent: an informal conversation does not provide the same documentary clarity as notice of termination given in accordance with the agreement.

4. Review its effect under Guatemalan law

Guatemala has no franchise-specific law or special mandatory pre-contractual disclosure regime for these transactions. The general rules of the Commercial Code, Decree 2-70, apply, supplemented by the Civil Code. The Industrial Property Law, Decree 57-2000, governs trade marks and other related rights, but does not make a letter of intent legally harmless.

The legal review should determine whether the text operates as a preliminary statement, an agreement imposing limited obligations or a commitment to enter into a contract. That assessment depends on its content, not just its heading. Nor should you assume that buying a franchise gives you an automatic right to cancel without consequences.

Practical conclusion: sign only when you can identify what binds you from that point onwards, what remains undecided and how you can withdraw from negotiations. If any answer depends on a verbal explanation, ask for it to be included in the document.