Franchise Agreements in Colombia: What to Review Before You Sign
## Franchising in Colombia
Colombia has no specific franchise law. Franchise agreements are governed by the Commercial Code (as an innominate contract), the Civil Code, and intellectual property rules.
This means the parties have broad contractual freedom — but it also means franchisees have fewer automatic protections than in countries with specific franchise legislation.
Essential elements of a franchise agreement
A well-drafted agreement should cover:
- Trademark license: which trademark is licensed, in what territory, and for how long
- Know-how and trade secrets: access to operating manuals, processes, recipes, systems
- Exclusive territory: the geographic area where only that franchisee operates
- Entry fee (franchise fee): the initial payment for the right to operate under the brand
- Royalties: the percentage of sales paid periodically to the franchisor
- Training and support obligations: what the franchisor provides
- Quality standards and audits: the franchisor's control over the operation
- Grounds for termination
Common risks for the franchisee
Exclusive supplier clauses Being required to buy only from the franchisor's suppliers can drive operating costs very high. Check whether the prices are actually competitive.
Territories without real exclusivity Some contracts say "preferred territory" without guaranteeing exclusivity. The franchisor may open another franchise very close by.
Terms with no right of renewal A 3-year contract with no right of renewal exposes the franchisee to losing their entire investment if the franchisor decides not to renew.
Termination without cause and minimal compensation If the franchisor can terminate the agreement unilaterally with just 30 days' notice, the franchisee has no time to recover their investment.
The letter of intent (LOI) before the contract
It's normal for the process to start with a letter of intent. While it's generally not binding, it sets the terms under which the final contract will be negotiated. Review it carefully — it shapes both parties' expectations.
Disclosure (FDD)
In serious franchise operations, the franchisor should provide a Franchise Disclosure Document with historical financial information, a list of current and former franchisees, and the contract terms. Insist on this document.
What to review in the franchisor's financials
- How many franchises have closed in the last 3 years?
- What's the average revenue of comparable franchisees?
- Does the franchisor carry debt that puts its operations at risk?
Tax considerations
The entry fee and royalties: - Withholding tax: applies if the franchisor is foreign (the withholding rate depends on applicable double-taxation treaties) - VAT: royalties paid to foreign parties are subject to 19% VAT (the taxable event occurs in Colombia) - Royalties are deductible from the franchisee's income tax
Are you considering acquiring a franchise, or structuring a franchise model for your business? We can review the agreement or support you in negotiating the terms.
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