Territory and Exclusivity When Franchising in Mexico

Granting a franchise in a city does not necessarily mean giving the franchisee exclusive rights to all its customers. When you turn your business into a franchise, you need to specify where each unit may operate and what competition you will allow within the network. Clear boundaries protect investment, support expansion and reduce disputes across the franchise network.

1. Distinguish between operating territory and exclusivity

In Mexico, franchises are specifically regulated by the Federal Law on the Protection of Industrial Property (LFPPI). Article 246 requires the agreement to be in writing and to include, among other minimum requirements, the geographical area in which the franchisee will carry out the activities covered by the agreement.

This obligation to define an area does not automatically grant exclusivity. If you decide to offer it, the agreement must explain its scope: which activities it protects, against whom and for how long.

Before negotiating, distinguish between three decisions:

• Operating territory: the area in which the franchise activities are authorised.
• Protection against new units: a commitment not to open company-owned outlets, other franchised outlets or both within specified boundaries.
• Reserved channels: business retained by the franchisor, such as certain national accounts or sales through its online shop.

Avoid promises such as ‘the whole city will be yours’. They can create expectations far broader than the rights actually granted. The commercial proposal, pre-contractual information and agreement should all describe the same protection.

2. Define a territory you can justify

Do not divide the map solely along municipal boundaries or allocate large areas just to secure your first franchise sale more quickly. An administrative boundary may separate streets that share a customer base, while a main road, a motorway or travel times can significantly affect a unit’s reach.

Use your experience of running the existing business to identify where customers come from, how far they travel and the outlet’s capacity to serve them. If you offer home delivery, also analyse actual delivery routes: a circle on a map does not necessarily represent a viable delivery area.

Prepare a territory profile covering:

• Boundaries identifiable by streets, coordinates or mapped polygons.
• Existing company-owned and franchised outlets.
• Operating capacity and delivery restrictions.
• Planned openings to which you have already committed.
• Circumstances that would justify reviewing the boundaries.

Attach a clearly readable map to the agreement, alongside a matching written description. Specify which takes precedence if a discrepancy arises and how changes to street names or administrative boundaries will be handled.

The territory should allow for a viable operation, but it is not a guarantee of sales or profitability. Nor should it block expansion indefinitely if the protection offered does not require that restriction.

3. Resolve overlaps between channels before selling a franchise

Territorial disputes are not limited to two nearby outlets. They also arise when someone buys online, requests delivery from another territory or works for a company whose branches are served by different units.

Draw up a simple matrix showing the channel, who is responsible for fulfilling the order, the allocation criteria and the financial arrangements. Depending on your model, consider over-the-counter sales, your online shop, delivery apps, corporate sales and services provided at the customer’s premises.

For example, if head office receives an order for delivery within a protected territory, it should be clear whether the local unit, another unit with available capacity or head office itself will fulfil it. You also need to define who issues the invoice, who handles after-sales service and whether any agreed compensation applies.

Distinguish between actively seeking customers outside the territory and serving someone who chooses to visit of their own accord. Do not assume that the agreement will treat both situations in the same way.

Restrictions on territories, customers or channels should undergo legal review under the Federal Economic Competition Law. Their assessment depends on how they are structured and on market circumstances; not every territorial restriction is unlawful, nor is every clause valid simply because it appears in an agreement.

4. Set out how protection is maintained and reviewed

If exclusivity is conditional on performance, use verifiable criteria linked to obligations the franchisee can fulfil. Avoid phrases such as ‘results satisfactory to head office’.

Document the metric, its data source, the assessment period and any applicable exceptions. Provide for notice, an opportunity to clarify matters and, where appropriate, a period to remedy shortcomings. Explicitly distinguish between losing territorial protection and terminating the agreement: they are not the same consequence.

Also establish a procedure for requesting an additional unit, expanding coverage or resolving disputes over orders. Any change must follow the agreed process and be documented, rather than relying on an informal conversation.

Practical takeaway: before offering your first territory, put together a contractual map, a channel matrix and review rules. If those three documents do not match what your sales team is promising, you are not yet ready to grant exclusivity.