Buying a franchise in Colombia: before paying a reservation fee

Paying a reservation fee to move forward with buying a franchise may seem like a minor formality. However, that payment may be subject to conditions that are difficult to unwind, even if you later decide not to sign. In franchising, transparent negotiations start with clarifying what information you will receive, what you are agreeing to and what will happen to your money if the deal does not go ahead.

1. Understand what legal protection exists before you sign

Colombia has no specific law comprehensively governing franchise agreements, nor a general requirement to provide a franchise disclosure document with standardised content and delivery deadlines. Colombia’s Ministry of Justice describes franchising as an atypical contract: it is governed by the parties’ valid agreements and the applicable general legal rules.

This does not mean negotiations fall outside the law. The Commercial Code, particularly Article 863, requires parties to act in good faith and with due care during the pre-contractual period, and provides for compensation for losses caused by breaching that duty. The Civil Code’s general rules on contracts and obligations also apply where relevant.

The absence of a mandatory disclosure document does not permit deception or make every contractual term valid. Nor does it, in itself, create an automatic right to recover every reservation payment. Any refund will depend on the agreement, the facts and the applicable law.

Do not assume you have the cooling-off rights available in certain consumer transactions: buying a franchise to run a business does not automatically mean you are acting as a consumer. Seek an independent legal review before paying.

2. Request a pre-contract information pack, not just a presentation

Even without a legally prescribed disclosure format, you can make further progress conditional on receiving enough documentation to make a decision. Request it in writing and agree when it will be provided.

To assess the reservation payment specifically, ask for:

• Details of the other party: registered company name, Colombian tax identification number (NIT), certificate of legal existence and representation, and evidence of the signatory’s authority.
• A draft of the final agreement: together with any annexes setting out significant obligations, or a clear process for reviewing them before committing.
• The reservation agreement: stating its purpose, duration, fee and refund conditions.
• The approval process: who decides whether you are accepted and which checks remain outstanding.
• How the payments relate to each other: whether the reservation fee is credited towards the initial franchise fee or pays for a separate service.

If certain documents contain confidential information, controlled access or a confidentiality undertaking can be agreed. Confidentiality should not prevent your authorised advisers from reviewing the essential terms.

Keep the versions you receive and a record of their dates. A sales presentation is no substitute for the document that will ultimately govern the payment.

3. Distinguish an expression of intent from a binding obligation

A document’s title does not, by itself, determine its legal effect. A ‘letter of intent’ may contain enforceable confidentiality, exclusivity or payment obligations. It may even include a commitment to enter into the franchise agreement later, depending on its wording and the applicable legal requirements.

Before signing, ask for a clear distinction between:

• Expressions of interest that do not create an obligation to buy or grant the franchise.
• Clauses that take effect immediately upon signing.
• Outstanding requirements for entering into the final agreement.
• The date on which the negotiation period ends.

Pay particular attention to exclusivity. If you agree not to negotiate with other brands, specify how long that restriction lasts and what the franchisor must do during that period. Avoid being tied down while the other party can delay providing documents indefinitely.

It is also worth clarifying whether you may share information with lawyers and accountants who are bound by confidentiality obligations. Seeking advice should not turn into an accidental breach.

4. Agree what happens to the money in each scenario

Do not settle for ‘refundable reservation fee’ or ‘non-refundable reservation fee’. The document should explain what happens if you withdraw, if the franchisor rejects your application or if an agreed condition is not met.

Negotiate specific answers for these scenarios:

• The franchisor decides not to proceed: how much will be refunded and by when.
• The franchisor fails to provide the agreed documents: whether you can cancel and recover the payment.
• The final agreement introduces material obligations that were not previously disclosed: how you can object and what happens if no agreement is reached.
• You withdraw from negotiations: any possible deductions and the basis for them.

If expenses are to be deducted, seek to ensure they are clearly defined, subject to an agreed cap and supported by evidence. Identify who will receive the money, verify the bank account through an independent channel and obtain written confirmation of the payment and its purpose.

Practical takeaway: before paying a reservation fee, put three things in place: sufficient information, a document defining your commitments and clear rules about the money. If any are missing, postpone payment and seek a legal review.