Franchises in Guatemala: review the non-compete clause

Buying a franchise can restrict more than how you run an outlet: it can also affect your other businesses, investments and projects. In franchising, a non-compete clause is intended to protect the brand’s know-how and business relationships. Before accepting one, identify exactly which activities it restricts, who is bound by it and how long it lasts.

1. Understand Guatemala’s legal framework

Guatemala has no specific franchise law or mandatory pre-contractual disclosure regime specifically for franchise agreements. You should therefore not assume that you will automatically receive an official document explaining all the restrictions before signing. Request the full agreement and its schedules, and have them reviewed by an independent adviser.

A franchise agreement is treated as a commercial contract without its own specifically defined statutory framework. It is governed by the Commercial Code, Decree 2-70, supplemented by the Civil Code, Decree-Law 106. The Industrial Property Law, Decree 57-2000, governs matters relating to trade marks, licensing and the protection of trade secrets; it is not a comprehensive franchise law.

A contractual restriction on competition should not be confused with the legal protection of a trade mark or confidential information. These are separate obligations. Nor is there a single duration that can be regarded as automatically valid for every restriction. A Guatemalan lawyer should assess its scope, justification and compatibility with applicable rules and the constitutionally recognised freedom of trade.

2. Identify what counts as competing

Terms such as ‘similar business’, ‘related activity’ or ‘indirect interest’ can cover far more than you might expect. A coffee shop franchise, for example, might seek to restrict any food and drink activity. That could affect a bakery you already own, even if its business offering is different.

Ask for a definition based on specific activities rather than broad categories alone. Check whether it covers:

• Owning or operating another outlet.
• Working as an employee, adviser or manager of another business.
• Holding a minority stake without taking part in management.
• Selling products online that the franchise also offers.
• Participating through another company or alongside other investors.

Draw up an inventory of your current activities and compare it against each restriction. Include companies, professional services and projects in development. If the franchisor knows about these activities and accepts them, include an express exemption in a signed schedule; a business discussion does not provide the same certainty.

3. Define who is covered, the territory and the duration

The party buying the franchise is not always the person who will run the outlet. A company may enter into the agreement while its shareholders or directors are also required to give personal undertakings. Check who signs each obligation and avoid accepting liability for the conduct of people you do not control.

If the agreement refers to family members, related companies or future business partners, ask for precise definitions. Mentioning a family member does not automatically make them a party to the agreement, but broad wording could seek to make you responsible for a breach arising from their activities.

You should also distinguish between restrictions that apply during the contractual relationship and those that would continue afterwards. For each, request a separate definition of:

• The specific activity prohibited.
• The geographical scope and treatment of online sales.
• The start and end dates.
• The people or entities bound and any agreed exemptions.

A restriction covering the whole of Guatemala warrants particular scrutiny if the outlet’s operations and customer base are local. Do not assume that an international template is suitable for your investment.

4. Negotiate more targeted protections

Ask which specific risk the franchisor is trying to address. If the concern is that confidential processes might be copied, it may be more appropriate to define confidentiality obligations and limits on the use of information than to prohibit all related business activity.

Alternatives you could propose include exempting existing businesses, allowing passive investments that provide no access to strategic information, or limiting the restriction to directly competing products and services. These options must be negotiated; they are not automatic rights for the franchisee.

Also establish a procedure for seeking approval for new projects. Define who can authorise them, what information you must submit and how the response will be documented. Do not treat silence as approval unless there is an express agreement to that effect which has been legally reviewed.

Finally, check that the agreement, schedules and confidentiality undertakings use consistent definitions. An exemption is of little use if another document prohibits the activity again without recognising it.

Practical takeaway: before signing, give your lawyer a list of your businesses and investments and ask them to check it against the clause. Accept only restrictions whose scope you can understand, comply with and factor into your assessment of the purchase.