Exiting a Franchise in Mexico: What to Agree Before You Buy

Buying a franchise also means thinking about the day you stop running it. A poorly planned exit can lead to costs, disputes and obligations that continue after the premises close. Discussing these terms before investing helps build clearer relationships within the franchise sector. This guide helps you assess your contractual exit options before committing your money.

1. Distinguish between expiry, early termination and transfer

Not every exit has the same consequences. Before comparing offers, ask for the agreement to distinguish between these scenarios:

• Expiry: the agreed term comes to an end. Check whether you must give notice that you will not renew, and how far in advance.
• Termination by agreement: both parties agree to end the relationship and document the terms.
• Termination for breach: one party invokes grounds for ending the relationship; both the grounds and the procedure matter.
• Transfer: another person acquires the business or takes over certain rights, subject to the relevant approvals and formalities.

Do not assume that selling furniture, changing business partners or handing over the keys ends the agreement. Nor should you assume that you can transfer the franchise to any buyer.

Ask for written examples explaining how three situations would be handled: you want to leave for personal reasons, a buyer comes forward, or the outlet fails to meet your expectations. Profitability below projections does not, on its own, give you a right to leave without consequences.

2. Check the grounds and procedure for termination

Mexico has specific legislation governing franchises: the Federal Law for the Protection of Industrial Property (Ley Federal de Protección a la Propiedad Industrial, or LFPPI). Article 246 requires franchise agreements to be in writing and to include, among other things, the grounds for termination and the circumstances in which their terms may be reviewed or amended by mutual agreement.

The law also provides that neither the franchisor nor the franchisee may unilaterally terminate or rescind the agreement unless it was entered into for an indefinite term or there is just cause. Early termination must follow the agreed grounds and procedures. An exit that breaches these rules may result in contractual penalties or liability for damages, as applicable.

With independent legal advice, review:

• Defined breaches: avoid ambiguous wording that could allow any disagreement to be treated as grounds for termination.
• Notices: identify who must receive them, how they must be sent and how delivery is proved.
• Remedying breaches: check whether there is an opportunity to put certain breaches right, and within what timeframe. Do not assume this right will always exist.
• Disputes: check the agreed courts or arbitration arrangements, the venue and the financial implications of the dispute resolution process.

If you are promised flexibility during negotiations, ask for it to be incorporated into the agreement. A sales explanation is no substitute for a clear clause.

3. Calculate the full cost of ceasing operations

Exit costs are not limited to a penalty. Prepare a list of obligations, who can enforce them and when they fall due. Include outstanding payments to the franchisor, suppliers, employees, landlord and creditors.

Pay particular attention to the lease: ending the franchise does not automatically end your obligation to pay rent on the premises. The same applies to loans, equipment leases and personal guarantees. Aim to align the duration and terms of these commitments before signing them.

Ask for the agreement to address each of these points:

• Which fees continue to accrue during the closure process?
• Who pays to remove signage and make the required changes to the premises?
• Can you sell the remaining stock, and on what terms?
• Is there a commitment to buy back stock or equipment, or merely a possibility subject to approval?
• How will the settlement of outstanding debts and the release of guarantees be documented?

The LFPPI provides that you are not obliged to sell your assets to the franchisor or its nominee when the agreement ends, unless otherwise agreed. Examine any compulsory sale clause and its valuation method carefully. Equally, do not assume that the franchisor is obliged to buy your business.

4. Ensure the transition and closure are documented

If you want to retain the option to sell, negotiate clear criteria for approving a new operator, the documents required, response deadlines and any transfer fees. Clarify whether the buyer will take over the existing agreement or have to enter into a new one. That distinction may affect the value of your investment.

For renewal, identify the requirements, notice periods, new fees and any refurbishment that may be required. Do not confuse compliance with the agreement with a guaranteed right to renew it.

Finally, review your continuing obligations: returning manuals, stopping use of the brand, handling data and maintaining confidentiality. The LFPPI provides for the franchisee to maintain confidentiality in relation to protected information after the relationship ends. Any non-compete restriction warrants specific legal review; do not assume it is automatically valid or invalid.

Practical takeaway: before buying, insist on a written exit plan covering grounds, notices, costs and continuing obligations. If you cannot explain how you would leave the franchise and what you would still owe, the agreement needs further review.