Territory and Exclusivity in Mexican Franchising

When franchising an established business, promising an ‘exclusive territory’ may seem like a straightforward way to attract prospective franchisees. However, unclear boundaries can lead to disputes when new outlets open or home delivery and online sales come into play. To build a strong franchise network, you need to turn that promise into verifiable rules that work for your operation and are reflected in the contract.

1. Distinguish territory from exclusivity

The territory is the geographical area in which the franchisee will carry out the activities covered by the contract. Exclusivity is an additional protection whose scope must be expressly agreed. Allocating a territory does not, in itself, prevent all other sales by the brand within that area.

In Mexico, the Federal Law on the Protection of Industrial Property (LFPPI) specifically regulates franchising. Article 245 defines a franchise as involving a written licence to use a trade mark, accompanied by technical knowledge or technical assistance to ensure consistent operations. Article 246 requires the contract to be in writing and to include, among other things, the geographical area of operation.

This requirement does not create automatic exclusivity. Before negotiating, distinguish between three decisions:

• Authorised location: the premises from which the franchisee may operate.
• Operating territory: the area in which the agreed activities will take place.
• Territorial protection: the restrictions the franchisor will accept regarding other openings or sales channels.

Avoid verbally offering greater protection than the documents provide. A sales presentation promising ‘the whole city’ may contradict a contract limited to a single neighbourhood.

2. Define the area using data and a map

Do not allocate territories based on distance alone. Two areas of the same size may differ considerably in demand, accessibility and the cost of serving customers. Use information from your existing business to analyse where customers come from, travel times, purchase frequency and service capacity.

Prepare a territory fact sheet containing:

• A dated map with identifiable boundaries.
• Streets, coordinates or other reference points that allow the boundary to be retraced.
• The authorised location and the procedure for requesting relocation.
• The assumptions used to estimate demand, without presenting them as guaranteed results.
• Any reserved areas or exceptions.

Postcodes can serve as a reference, but should be accompanied by unambiguous boundaries. You should also specify which document takes precedence if the map and the written description differ.

Test the boundaries against real scenarios: a customer on a boundary street, a shopping centre spanning several blocks or premises whose entrance changes. If your team cannot resolve these cases consistently, the definition needs to be more precise.

3. Agree how the different channels will work

A territory designed around over-the-counter sales may be inadequate for a business that also sells through apps, e-commerce or corporate accounts. Decide how these channels will coexist before offering the franchise.

For example, distinguish between actively seeking customers outside the territory and receiving an unsolicited order from someone living in another area. These are not operationally identical situations and require specific consideration when drafting the contract.

Create a simple matrix covering the channel, who is responsible for the sale, which outlet fulfils it, how revenue is allocated and who handles complaints. Include, where relevant:

• In-store sales.
• Orders received through the central website.
• Deliveries through third-party platforms.
• Agreements with businesses that have multiple branches.
• Events and temporary sales outlets.

If the franchisor intends to retain certain channels, this must be communicated clearly. It is also worth defining who bears the cost of discounts, returns and delivery. Territorial or commercial restrictions must be reviewed under applicable competition law; including them in the contract does not guarantee that they are lawful.

4. Document conditions and changes rather than improvising

If exclusivity depends on achieving certain results, set measurable performance indicators, information sources, assessment periods and proportionate consequences. Do not use expressions such as ‘satisfactory sales’ without explaining how they will be assessed.

Distinguish between a failure to fulfil an obligation and an unmet commercial expectation. Provide for notices, opportunities to remedy breaches and mechanisms for resolving disagreements. A reduction in territory should not become a discretionary decision hidden in an annex.

Article 246 of the LFPPI requires the contract to state the circumstances in which its terms may be reviewed and, where appropriate, amended by mutual agreement. Any mechanism for adjusting a territory therefore requires careful legal drafting consistent with the other obligations.

Article 245 also requires information on the state of the business to be provided at least thirty days before the contract is entered into. The territorial proposal presented to the prospective franchisee must be consistent with the pre-contractual documentation and the final agreement.

Putting this into practice: before offering your first territory, prepare a map, a sales-channel matrix and a list of exclusivity conditions. Have them legally reviewed and check that your sales team can explain exactly what protection they are offering.