Advance Payments and Refunds When Franchising Your Business in Mexico

Before accepting money from your first franchisee, you need to decide what will happen if the opening is delayed or never goes ahead. Simply describing a transfer as a ‘reservation deposit’ or declaring all payments final is not enough. An advance payment and refund policy should explain what each payment covers, when it is used and how it will be refunded, where applicable. This clarity protects trust across your franchise network.

1. Distinguish each advance payment by its purpose

The first step is not to draft a clause, but to identify the payments you might collect before opening. Each should have a verifiable purpose and be treated separately.

Prepare a record for each payment category covering:

• Purpose: the service, right or purchase the money covers.
• Recipient: whether the money goes to your company or to a third party engaged directly.
• Point of allocation: when the money ceases to be an advance and is applied to the agreed purpose.
• Evidence: the document confirming the service provided or expense incurred.
• Balance: what happens to any money that has not yet been used.

For example, money intended for equipment purchases should not be confused with payment for preparatory work. If the supplier receives the money directly, identify who contracts with them and which cancellation terms apply.

Avoid using a single generic category for everything. Combining payments makes it harder to explain a refund and can create accounting, tax and contractual discrepancies.

2. Incorporate the policy into the contract in line with Mexican law

Mexico has specific legislation governing franchises. Article 246 of the Federal Law for the Protection of Industrial Property (Ley Federal de Protección a la Propiedad Industrial) requires franchise agreements to be in writing. Section IV states that they must include the policies, procedures and time limits relating to refunds, financing and other payments or consideration due from the parties, on the agreed terms.

Simply stating that ‘refunds will be reviewed on a case-by-case basis’ therefore leaves unresolved matters that should be agreed in advance. Define the circumstances in which a refund is available, the calculation method, the documents required, who is responsible for deciding and the payment deadline.

Article 245 also requires information about the company's current standing to be provided to the prospective franchisee at least thirty days before the agreement is entered into. The financial terms presented during negotiations should be consistent with the contract; significant restrictions should not be disclosed only when requesting a signature.

If you intend to collect payments under a letter of intent or preliminary agreement, obtain a specific legal review. The document's title alone does not determine its effects or remove applicable legal obligations. Nor should you assume that labelling a payment ‘non-refundable’ makes any retention of funds lawful.

3. Define scenarios and a verifiable calculation method

Create a matrix before accepting payments. For each scenario, identify which party still has outstanding obligations and which amounts might be refundable. Consider at least the following:

• The prospective franchisee decides not to proceed before the contracted activities begin.
• Your company cannot carry out an activity it has committed to.
• An order has already been placed with a third party and is subject to cancellation terms.
• The opening is postponed, but both parties wish to continue.

These situations do not all require the same solution. A postponement may call for an updated timetable, whereas a cancellation requires payments, goods or services supplied, and outstanding commitments to be reconciled.

When designing the calculation method, you can start with the amount received and distinguish sums applied to goods or services actually supplied from unused balances. Any deduction must have a contractual basis and supporting documentation; it should not automatically become an improvised penalty.

For example, if you have received an advance payment for equipment that has not yet been ordered, do not treat it as an irreversible purchase. If an order has already been placed, check its actual terms before announcing that funds will be retained. The final formula should undergo legal review for each payment category.

4. Establish a procedure your team can follow

Designate a channel for receiving requests and a person responsible for managing each case. Set separate deadlines for acknowledging receipt, reaching a decision and making an approved refund. Avoid open-ended wording such as ‘when authorised by administration’.

Each decision should show the amount received, how it has been used, any justified deductions and the final balance. Coordinate with your accounting team on the relevant tax documentation and retain evidence of the refund payment.

Finally, give your sales team a clear version of the policy. No one should promise refunds beyond the authorised terms simply to close a deal.

Practical takeaway: before collecting the first advance payment, put its purpose, refund conditions and the person responsible for handling requests in writing. A policy backed by evidence is worth more than a verbal promise.