Sub-franchising in Mexico: what to check before you buy

Buying a franchise to operate an outlet is not the same as acquiring the right to bring in other franchisees. If a brand offers you the opportunity to expand through sub-franchising, you need to assess an additional responsibility: supporting and coordinating businesses run by third parties. This franchise model requires clarity about who grants the rights, who provides the services and who is accountable when something goes wrong.

1. Distinguish sub-franchising from opening multiple outlets

Permission to open several outlets of your own does not mean you can grant franchises to other people. In the first case, you or authorised companies operate the outlets; in the second, you enter into contracts with third parties allowing them to use the business model on the permitted terms.

Nor is it enough for a sales proposal to use terms such as “master franchise”, “developer” or “regional representative”. The package name is no substitute for expressly agreed rights. You may be tasked with finding candidates without having the authority to sign contracts with them or collect fees in your own name.

Before comparing prices, ask for a written description of how the arrangement will work:

• Will you open your own outlets, bring in third-party operators, or do both?
• Who will sign the contract with each new franchisee?
• Who will collect the fees and issue the relevant invoices or receipts?
• Who will train, supervise and support the new outlets?

Map out the relationship between the brand, your company and the future operators. If the answers change depending on whom you ask, the proposal is not yet sufficiently clear for you to invest.

2. Verify the authorisation and pre-contractual information

Mexico has specific franchise regulations. Article 245 of the Federal Law for the Protection of Industrial Property (Ley Federal de Protección a la Propiedad Industrial) requires information about the state of the business to be provided at least thirty days before the contract is signed.

Article 246 requires the contract to be in writing and to include, among other elements, the terms and conditions for sub-franchising where the parties agree to it. Meanwhile, Article 65 of the Regulations under the Industrial Property Law includes, among the required pre-contractual disclosures, whether or not the franchisee has the right to grant sub-franchises to third parties.

Therefore, buying a franchise does not automatically confer the right to grant sub-franchises. Check that the pre-contractual information, commonly known as the Circular de Oferta de Franquicia or COF, is consistent with the contract and its annexes.

If the party offering you these rights received them from another company, request documentary evidence that it is authorised to grant them to you. A lawyer should check the chain of authorisations and its limits, particularly where foreign rights holders or several intermediaries are involved.

When granting a sub-franchise yourself, you must also review the legal obligations you will assume towards the new franchisee, including pre-contractual disclosure and contractual formalities. Do not assume that handing over the brand’s brochure will be enough.

3. Calculate the cost of supporting third-party operators

Your financial assessment should not focus solely on how much you will receive for each new franchisee. Sub-franchising may require staff, travel, monitoring systems, legal documentation and the capacity to resolve operational issues.

Prepare a budget separate from the one for your own outlets. Depending on the responsibilities agreed, include:

• Selecting and assessing candidates.
• Preparing contracts and pre-contractual disclosure documents.
• Training and support for new openings.
• Supervisory visits and ongoing support.
• Administering fee collection and payments to the brand.

Next, identify which income you will retain and which amounts you must pass on. Clarify when each payment obligation arises, what happens if a third-party operator pays late, and who bears the costs of an opening that does not go ahead.

Test a scenario in which no new franchisees join for several months. If you need to keep selling sub-franchises to support those already granted, reassess the viability of the arrangement. Upfront income should not be treated as money freely available to spend without accounting for future commitments.

4. Align the main agreement with the sub-franchise agreements

The contracts must work together. Do not promise a third party a contract term, service or permission that your own agreement with the brand does not secure for you.

Ask for clear provisions covering the candidate approval process, the documents you may use and the powers retained by the franchisor. It is also worth specifying who will handle complaints and how ongoing oversight responsibilities will be divided.

A critical issue is what will happen to the sub-franchises if your main agreement ends. Do not assume that the brand will take them over or that they will simply cease to exist without consequences. Negotiate a continuity or transition mechanism, subject to legal review, and ensure that future operators receive consistent information.

Practical conclusion: before paying for the right to grant sub-franchises, put three compatible elements in place: express authorisation, a budget for supporting third-party operators and coordinated contracts. If any one is missing, you cannot yet properly assess what you are buying.