Confidentiality When Buying a Franchise in Mexico

You need information to assess a franchise, but receiving it can create obligations even before you buy. A poorly defined confidentiality agreement can make it difficult to review the opportunity with your advisers or expose you to claims if you ultimately decide not to proceed. In franchising, protecting know-how and enabling an informed decision are compatible aims: the key is to define what you may do with the documents you receive.

1. Distinguish confidentiality from an obligation to buy

A confidentiality agreement is usually presented before financial information, procedures or details of the business model are shared. Its purpose should be to restrict the use and disclosure of that information, not indirectly oblige you to buy the franchise.

Before signing, check that it identifies the parties, describes the purpose of the assessment and makes clear that receiving information does not amount to agreeing to invest. Also look for obligations that go beyond confidentiality:

• Charges for withdrawing from the selection process.
• Exclusivity requiring you to negotiate only with that brand.
• Restrictions on involvement in other businesses.
• Commitments to buy or open a franchise subject to vaguely defined conditions.

These clauses need separate scrutiny. Do not assume they have no effect simply because they appear in a document called a ‘confidentiality agreement’. Ask for any commercial commitment to be expressly identified and reviewed by your lawyer.

2. Define which information is protected

Avoid accepting a description so broad that it covers any knowledge related to the sector. It is better to identify specific categories: manuals, recipes, processes, commercial lists, non-public financial terms or documents supplied to assess the proposed transaction.

Negotiate exclusions for information that is already public, that you can demonstrate you legitimately knew before receiving it, or that you obtain from an authorised third party. The agreement should also address knowledge developed independently, without using protected materials. These exclusions must be documented; do not simply assume they apply.

In Mexico, the Federal Law on the Protection of Industrial Property (Ley Federal de Protección a la Propiedad Industrial, or LFPPI) specifically regulates franchises. It also requires franchisees to maintain the confidentiality of information that is confidential, or that they learn of in that capacity, during the contract and after it ends. Do not therefore assume that all obligations disappear when the relationship ends.

The same law protects trade secrets where they meet the legal requirements. However, labelling an entire set of documents a ‘trade secret’ does not automatically make every piece of information one. Seek advice to distinguish this statutory protection from any additional obligations the agreement seeks to impose.

3. Preserve your ability to assess the opportunity with advisers

A clause prohibiting disclosure to any third party could prevent your lawyer or accountant from assessing the purchase. Request express permission to share the necessary information with professional advisers and, where appropriate, prospective business partners or organisations considering financing your investment.

Define who may have access, for what purpose and subject to which confidentiality duties. Also check whether you would be liable for any conduct by those people or only for breaches within the agreed scope. Do not circulate the entire document pack if sharing selected documents is sufficient.

Confidentiality should not be confused with mandatory pre-contractual disclosure. Article 245 of the LFPPI requires the franchisor to provide information about the state of its business at least thirty days before the contract is entered into. This disclosure is commonly known as the Circular de Oferta de Franquicia, or COF.

Signing a confidentiality agreement does not replace that obligation or remove the statutory period. If a document includes a declaration that you have already received all the information, check that this is true before signing it. Keep a record of the dates and the files actually supplied.

4. Agree what happens if you decide not to buy

The agreement should explain how to close the assessment process, including the return of documents, deletion of copies and handling of digital backups. Ask whether your advisers may retain an archive copy where necessary to meet legal or professional obligations, subject to continuing confidentiality.

Review how long the obligations last and any contractual penalty. Ask for clarification of what conduct constitutes a breach and how the penalty relates to any claim for damages. Do not accept an amount without understanding its financial and legal implications.

Protect your own data too. During the selection process, you may provide financial statements or details of your assets; ask for their use to be limited to the assessment and for those who will have access to be identified.

Practical conclusion: before receiving sensitive information, agree what is protected, who may review it and how the assessment will end. A good agreement allows you to examine the purchase thoroughly without committing you to proceed.