Just like Home?
Don’t kid yourself when considering expansion in Mexico
Dateline: Mexico City
Sitting in our firm’s Mexico City office, it’s easy to believe I’m in my office in Washington, D.C. Everyone speaks English. Most of the literature and correspondence, in addition to Spanish, is in English, the lingua franca of international business transactions. As in Washington, the communications with others around the world are instantaneous, by landline, cell phone, email or videoconference.
That sense of a borderless world is largely true of Mexico itself, of course, and especially of its relationship with its neighbor to the North. Most of the government officials, executives and professionals with whom I deal have been educated, lived in or worked in the States. We are only a short hop from a number of U.S. cities.
Of all the foreign direct investment into Mexico, more than half comes from the United States. It is a fitting coincidence that we are now marking the 20th anniversary of NAFTA, which was designed to eliminate barriers to trade and commerce between the two countries and increase opportunities for cross-border investment.
All of which can be seen in vivid color in franchising. It’s a large market for franchisors, with significant growth in recent years, and estimated to have 1,000 to 1,200 franchise concepts, with a franchise association (25 years old) with 250 franchise concepts or affiliates.
It’s difficult to name a significant U.S. franchisor without a presence in Mexico. Of all the non-Mexican franchise brands operating there, perhaps half are from the United States. And now Mexican franchise concepts are making their way North.
It can therefore be tempting to fall into the comfortable assumption that “it’s just like doing business at home.”
Not so fast.
As always, when contrasting franchising in two countries—even two with a long history of osmosis and a long but notoriously porous border—the principal issue is one of culture. But for our purposes, I’ll ignore that far more important question, and focus only on the comparatively narrow issue of law.
It’s true that Mexico, like the United States has a pre-disclosure requirement (and, in Mexico, not much more by way of statutory impediments to franchising). But it would be a dangerous mistake to assume that you can simply parachute in your agreement and disclosure document to the welcoming arms of these friendly neighbors. Here are just a few of the differences you will discover. (If you’re lucky, or if you’ve done your homework first, you’ll make that discovery earlier rather than later.)
Some U.S. franchisors think they can avoid the Mexican franchise regulations by relying for revenue entirely on the sale of goods, or by deferring the initial payment. Wrong. There is no “fee” element required here.
Unlike the case at both federal and state levels in the U.S., there are no exemptions or exclusions.
Unlike in the U.S., you will find there are certain parts of Mexico, depending on the nature of your franchise, where you cannot operate.
The Civil Code, you will find, is more rigid, and devoid of such useful tools as broad injunctive relief. You will need to supply by contract some of what you assume to be available to you under U.S. common law.
The information to be provided to a prospective franchisee must, as in America, be in advance of the execution of the franchise agreement. But here it’s a full 30 business, not calendar, days.
Mexico, unlike the U.S., does not limit the information you can include in a disclosure document. But that laissez-faire approach can be a trap, if it leads you to include information you have in your U.S. document that may be misleading to a prospective franchisee in Mexico.
The 2006 amendments to the intellectual property law require a great deal of information to be contained in the franchise agreement itself. To most American lawyers it will seem peculiar, as if you are inserting a disclosure document into a franchise agreement.
Mexican labor law, as in some other countries, can be a nightmare for most U.S. practitioners, so the provisions in your franchise agreement to avoid “employment” characterization and vicarious liability must be reviewed with care—and probably expanded, and appropriate indemnities considered. Beyond the agreement itself, the law limits the involvement of the franchisor in the organization and operation of the franchisee.
Your tax treatment in the U.S. is pretty straightforward: You pay taxes on the royalties you receive. But in Mexico, again as in some other countries, you will need advice as to how to structure and characterize the payments you will receive from a tax perspective.
Not all the differences are troublesome, of course:
- A “National Franchise Program” (PNF) promotes franchising and extends credit at low or no interest to prospective franchisees under certain circumstances, as well as providing consultancy free of charge.
- There are no statutory requirements of renewal.
- Confidentiality obligations are imposed on the franchisee.
- Mexican law recognizes only direct damages and losses, not consequential or punitive damages.
But there are enough differences that are troublesome to cost you a lot of time, a lot of money and plenty of legal headaches, if you don’t do your homework and get and heed good counsel.
So by all means allow yourself to enthuse over the size of the market (well above 100 million), the rapidly growing middle class, the demand for U.S. goods and services, and the malls that seem to sprout everywhere. Enjoy the marvelous food and drink and atmosphere.
But don’t kid yourself. You’re not at home.
Philip F. Zeidman is a senior partner in the Washington, D.C. office of DLA Piper. He can be reached at Philip.Zeidman@dlapiper.com