Franchising in Guatemala: review the non-compete clause

Buying a franchise can limit your involvement in other businesses, even after your relationship with the brand ends. In Guatemala’s franchise market, the non-compete clause deserves a review in its own right: understanding the royalties and initial investment is not enough. Before signing, identify which opportunities you would be giving up and ask for any restrictions to be precisely defined.

1. Distinguish brand protection from restrictions on competition

Confidentiality protects information that is not publicly available; a trade mark licence allows you to use specified marks; a non-compete clause restricts business activities. Although these obligations may appear together, they do not have the same scope.

One clause might prevent you from running a similar business while you are a franchisee. Another might seek to extend that ban beyond the contract’s expiry or cover shareholdings in other companies. Do not accept undefined terms such as ‘related businesses’ or ‘indirect competition’.

Ask for the contract to specify:

• Which products, services or business models are considered competitors.
• Whether managing, advising, financing or simply investing is prohibited.
• Whether a passive minority stake is treated in the same way as running an outlet.
• Which of your existing businesses or investments will be exempt.

For example, if you buy a coffee shop franchise and already have a stake in a bakery, do not assume the two activities are compatible. Explain the situation before committing any money and, if the brand accepts it, include a written exception identifying the business and the agreed conditions.

2. Review the clause under Guatemalan law

Guatemala has no specific law comprehensively governing franchises, nor a mandatory franchise-specific regime requiring pre-contractual disclosure when selling them. The relationship falls under the general provisions of the Commercial Code, Decree 2-70, supplemented by the Civil Code, Decree-Law 106.

The Industrial Property Law, Decree 57-2000, governs matters such as trade marks, licences and the protection of business information. That protection does not, in itself, authorise every possible restriction on competition.

There is therefore no franchise-specific rule that allows you to assume a particular duration or geographical scope will automatically be valid. Instruct a Guatemalan lawyer to assess the clause against applicable mandatory legal provisions and the specific circumstances. The fact that a restriction appears in the contract does not, by itself, establish its validity or enforceability.

Equally, do not assume that you can ignore a broadly worded restriction without consequences. The review should take place before you sign, not after you have invested in an activity that the franchisor considers incompatible.

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

Start by identifying whom the clause seeks to bind. If a company is buying the franchise, check whether its shareholders or directors must also give a personal undertaking. Do not confuse an obligation of the company with one assumed by an individual.

Pay particular attention to references to family members, affiliated companies or future business partners. Ask your lawyer to clarify who signs, what liability they assume and how actions by third parties outside your control would be treated. Avoid undertaking to guarantee other people’s conduct without understanding the consequences.

Next, distinguish between two periods: while the franchise agreement is in force and after it ends. For each period, ask for the territory and restricted activities to be defined. If online sales are included, clarify how their geographical reach will be determined.

It is also worth establishing:

• The date from which the post-contract restriction starts to run.
• What happens if the contract expires without renewal.
• How termination resulting from a breach by the franchisor is treated.
• Whether there is a procedure for requesting written exceptions.

These are matters for negotiation, not automatic rights. The aim is to avoid a restriction whose scope only becomes clear when you want to start another business.

4. Assess the impact and document any exceptions

A non-compete clause can carry a cost even if it does not appear in your start-up budget. Consider whether it would prevent you from making use of your experience, retaining an existing investment or developing another source of income. Weigh that impact against the benefits of joining the brand.

Also check which contractual consequences are предусмотрены for an alleged breach: penalties, claims for damages or termination. Seek advice on their scope and do not assume that a penalty is necessarily your only financial exposure.

Before signing, prepare a list of your current activities and foreseeable plans. Any relevant permission should be incorporated into the contract or a signed annex, rather than left solely to sales discussions.

Practical conclusion: sign only once you can explain which activities are restricted, who is bound, where the restriction applies and for how long. If any answer depends on a verbal interpretation, ask for written clarification and have it reviewed by a local lawyer.