Buying a Franchise in Colombia: Assessing the Franchisor’s Financial Health

A well-known brand may attract customers even if the company behind it lacks the financial resources to sustain its operations. Before buying a franchise in Colombia, it is worth examining the franchisor’s solvency: its ability to meet its obligations and maintain the resources the franchise network needs. This assessment is separate from calculating how much your future outlet might earn.

1. Identify which company supports the operation

The name displayed above the door does not always correspond to the company that will receive your payments or provide support. A single brand may involve several companies: one that owns the rights, another responsible for expansion and another handling supplies.

To assess solvency, draw up a simple map of financial responsibilities:

• Which company will receive the initial franchise fee and royalties?
• Which company pays the team that supports franchisees?
• Who maintains the shared resources essential to day-to-day operations?
• Does the company you will contract with depend on transfers from another company?

A strong corporate group does not automatically mean your contract has its financial backing. If you are shown a parent company’s accounts, also request those of the company you will contract with. Where another company’s backing is crucial, a lawyer should review how it will be documented and what it will actually cover.

2. Examine the accounts, not just the brand’s sales

Ask for financial statements covering several recent financial years and, if some time has passed since the latest year-end, interim financial information. Request the accompanying notes and, where applicable, the report of the statutory auditor (revisor fiscal). The documents should clearly identify the entity, the reporting period and those responsible for preparing them.

With an accountant’s help, review four areas:

Liquidity. Compare cash and assets that can reasonably be converted into cash with obligations falling due soon. A large balance of outstanding receivables is not the same as available cash: what matters is who owes the money, how long it has been outstanding and how likely it is to be collected.

Debt. Examine repayment dates, guarantees and whether obligations are concentrated among a small number of creditors or fall due at the same time. The aim is not to reject every company with debt, but to understand whether it can repay what it owes without undermining the services it has promised.

Recurring earnings. Distinguish income from ordinary business activities from one-off gains, such as the sale of an asset. An isolated positive result may not be repeated.

Cash flow. Check whether operations generate cash or require continual capital injections and borrowing. Making an accounting profit and having enough money to pay staff and suppliers are different things.

No single indicator can tell you whether a franchise is financially sound. Interpret the figures alongside the company’s trading history, commitments and operating model.

3. Identify dependence on new openings

One particularly useful question is how heavily the franchisor relies on selling new franchises to cover its regular expenses. Initial franchise fees may fund legitimate onboarding activities, but they should not be confused with guaranteed recurring income.

Ask for an explanation of its revenue mix: initial fees, royalties, company-owned outlets, supplies or other sources. Then put forward a specific scenario: if new openings slowed down, how would it fund the team and services promised to existing franchisees?

Check the answer against the accounts and expansion budget. Ask whether growth requires recruiting staff, expanding premises or taking on debt before sufficient income comes in.

Watch for these warning signs:

• The sales pitch does not match the financial information.
• Numerous openings are announced without an explanation of how support for them will be funded.
• Significant overdue obligations appear without a credible repayment plan.
• You are pressured to sign while essential financial questions remain unanswered.

No single warning sign proves insolvency. It does, however, justify further investigation or postponing your decision.

4. Turn your findings into conditions for proceeding

In Colombia, a franchise agreement is an atypical contract: there is no specific law comprehensively regulating it, nor a general mandatory pre-contractual disclosure regime specifically for franchises. The parties’ valid agreements apply, alongside the general provisions of the Commercial Code and, where relevant, the Civil Code, including the duty of good faith. Law 1429 of 2010 is not a franchise law.

You should therefore not assume that you will automatically receive a standardised financial disclosure pack. Request the information before committing any money and agree confidentiality terms if necessary. The absence of a specific disclosure obligation does not remove the general duties of good faith.

With your advisers, keep a record of the documents reviewed, explanations received and outstanding questions. If a particular level of financial capacity or corporate backing is decisive, consider expressly incorporating it into the agreement, together with commitments to provide information throughout the relationship. Do not treat a forecast as a guarantee that the business will continue operating.

Practical conclusion: before paying, confirm which company financially sustains the franchise, where its cash comes from and how it would meet its obligations if it stopped opening outlets. If you cannot verify this, you do not yet have a sufficient basis for deciding.