Subfranchising in Mexico: when to allow it and how to agree the terms

When franchising an existing business, you may receive an attractive proposal: an investor will find operators and develop new franchises for you. Before accepting, distinguish between opening several outlets and authorising subfranchising. The latter adds another contractual relationship and requires the ability to pass on and support the business model through an intermediary. In a franchise network, growth with unclear responsibilities can harm both operators and customers.

1. Distinguish multi-unit operation from subfranchising

A franchisee can operate several outlets without having the right to grant franchises to other people. Under that arrangement, the franchisee remains directly responsible for its outlets under the contracts signed with you.

Subfranchising is different: you authorise your franchisee to grant third parties certain rights to operate the business model. This intermediary is usually called a master franchisee, but the commercial label given to the agreement does not replace express contractual authorisation.

Nor does an agent who introduces candidates become a master franchisee simply by doing so. They may help recruit franchisees without being authorised to sign contracts, grant trade mark licences or commit to providing services on your behalf.

Before negotiating, map out the proposed structure:

• Who will enter into a contract with each end operator?
• Who will permit use of the trade mark, and under what authority?
• Who will receive payments and be responsible for delivering the promised services?
• Who will resolve issues that the intermediary cannot handle?

If the answers change depending on who explains the proposal, the structure is not yet sufficiently defined to offer it to others.

2. Check that you can delegate without losing consistency

The fact that your business works and can be replicated does not prove that another company is ready to develop a franchise network independently. Subfranchising also requires you to pass on organisational capabilities: coordinating openings, training teams and responding to problems across several outlets.

Assess the proposed structure specifically. Capital or contacts alone are not enough. The intermediary must have named people in charge, sufficient time and the resources to fulfil the commitments it will make to third parties.

Prepare a simple matrix with three columns: activity, responsible party and evidence of completion. Include approval of new outlets, pre-opening preparations, issue resolution and communication of operating instructions. Avoid assigning an activity to ‘both parties’ without specifying who makes decisions and who carries them out.

A cautious alternative is to start with outlets operated directly by that franchisee, without granting subfranchising rights yet. This lets you observe its organisational capabilities before bringing in third parties. Document this decision; an expectation of growth must not be presented as an existing right.

3. Reflect the authorisation in the Mexican legal documents

Mexico specifically regulates franchising. Article 245 of the Federal Law on the Protection of Industrial Property (Ley Federal de Protección a la Propiedad Industrial) provides for a written trade mark licence accompanied by technical knowledge or technical assistance to ensure uniform operation in accordance with the owner's business model.

Article 246 requires franchise agreements to be in writing. Section VIII states that the agreement must contain the terms and conditions for subfranchising where the parties agree to it. Do not, therefore, treat this authority as an automatic consequence of granting a franchise or permitting several outlets to open.

Article 245 also requires anyone granting a franchise to provide the prospective franchisee with information about the state of their business at least thirty days before entering into the agreement. In a subfranchising structure, the legal review must identify who grants each franchise and how they will meet their disclosure obligations. Documents provided to the intermediary do not, by themselves, replace the information that must be given to the end operators.

Commission a joint review of the main agreement and the template subfranchise agreement. Neither should promise trade mark rights, contract terms or services that cannot be supported under the other. If you decide not to authorise subfranchising, state this clearly.

4. Set limits and an escalation process

The authorisation must address specific situations rather than consist of a generic statement. Define, at a minimum:

• Scope: which business format may be subfranchised and under what conditions.
• Approval: whether each new operator requires your written consent and which documents must be submitted.
• Signing: who signs each agreement and which commitments the intermediary may not make on your behalf.
• Services: which services the intermediary will provide, which you will retain responsibility for and how these arrangements will be communicated to the end operator.
• Duration: how the contract periods will align to avoid incompatible promises.

Also establish an escalation process for situations where the intermediary fails to respond. The end operator should know whom to contact about an issue and what to expect, without assuming that the trade mark owner provides an unlimited guarantee.

As a practical step, prepare a one-page outline showing the parties, contracts and responsibilities. If you cannot explain it clearly, simplify the model before authorising subfranchising.