Franchise royalties in Mexico: what to negotiate before you buy

A seemingly low royalty can prove expensive if it is calculated on income you never receive or comes with minimum fees. Before entering the Mexican franchise market, you need to understand how much you will pay, how it will be calculated and how it may change. This review helps you compare offers and turn sales promises into clear contractual obligations.

1. Identify all recurring payments

Do not compare brands solely on their advertised royalty percentage. Request a written list of mandatory charges payable while running the business, and establish who collects each one: the franchisor, an affiliated company or a third party.

Organise the information in a table with five columns: charge, calculation formula, payment frequency, taxes and conditions for changes. Where applicable, include:

• Fixed royalty: a set amount per period, regardless of sales.
• Variable royalty: a percentage of a calculation base defined in the contract.
• Minimum fee: a minimum payment that may apply even when the variable royalty works out lower.
• Advertising contribution: funds allocated to shared brand campaigns.
• Technology charges: mandatory licences, platforms, maintenance or payment systems.

Clarify whether each amount includes Mexican value added tax (IVA) or whether it is added, where applicable. Also ask for any annual charges, update fees or fees for additional audits to be identified. Even if they are not monthly, they can make a substantial difference to your comparison.

The crucial question is: which payment obligations will remain in force if the outlet has low sales or temporarily suspends operations? Do not assume that stopping sales automatically suspends fees.

2. Define the calculation base clearly

Terms such as ‘total sales’, ‘gross revenue’ and ‘turnover’ need contractual definitions. They do not necessarily mean the same thing and may produce different results when returns, promotions or credit sales are involved.

Ask for a formula that answers at least the following questions:

• Does the calculation base exclude IVA charged to customers?
• How are returns, cancellations and refunds deducted?
• Do promotions reduce the calculation base, or is the royalty calculated on the original price?
• Are sales through platforms counted before or after platform commissions?
• Are advance payments and gift cards recognised when payment is received or when they are redeemed?
• Do credit sales trigger royalties before payment is collected?

There is no single commercial answer that applies to every brand: what matters is understanding the formula and assessing its effect. A platform commission, for example, does not automatically reduce the royalty; you need to check the agreed terms.

Request a sample royalty calculation using hypothetical transactions that include a return, a discount and a sale through a platform. Reproduce it with your accountant. If the parties arrive at different amounts, the wording still needs work.

Also agree reporting cut-off dates, payment deadlines, supporting documentation and a procedure for correcting discrepancies without duplicating payments.

3. Review advertising contributions, minimum fees and increases

An advertising contribution does not necessarily pay for advertising directly promoting your outlet. Ask who manages the funds, which expenses they can cover and whether you will receive reports on how they are spent. Also check whether you must fund additional local advertising and whether that spending counts towards any contractual obligation.

These terms must be expressly negotiated; do not assume you have an automatic right to approve every campaign or recover contributions that are not spent in your area.

For minimum fees and increases, review three points:

When charges begin. Establish whether fees start when the contract is signed, when systems are provided or when the outlet opens. Negotiate what happens if there are delays, distinguishing between those attributable to the franchisor and those beyond its control.

Adjustments. Identify the index, date, formula and, if agreed, any cap. A vague reference to ‘current rates’ makes it difficult to predict your financial commitments.

Technology changes. Ask whether a new platform could lead to additional charges. Seek a process for notifying, justifying and agreeing to significant changes in financial terms.

Test the formulas against low, medium and high sales scenarios. This will help you spot when a minimum fee makes the advertised percentage irrelevant.

4. Incorporate the agreed terms into a contract under Mexican law

Mexico has specific franchise legislation. Article 245 of the Federal Law for the Protection of Industrial Property (Ley Federal de Protección a la Propiedad Industrial, or LFPPI) requires the franchisor to provide information on the state of its business at least thirty days before the contract is entered into. Use that period to compare the disclosed charges with the contract and its annexes.

Article 246 requires a written contract whose minimum contents include policies and procedures relating to payments, financing and reimbursements. The law does not set a standard royalty percentage: you must assess and agree the specific financial terms.

Have a lawyer review the clauses on changes to terms, late-payment interest, audits and the consequences of reporting discrepancies. Any promised discount or fee waiver should be documented, including its duration and conditions. It is also sensible to establish which document takes precedence if the contract, annexes and commercial proposal contradict one another.

Practical conclusion: before signing, insist on a complete list of charges, a calculation formula you can reproduce and clear rules for adjustments. If you cannot calculate a monthly payment from those documents, you still need greater clarity before committing your money.