Buying a Franchise in Colombia: Investing with Business Partners

Buying a franchise with business partners allows you to pool resources and skills, but it also means aligning expectations. In franchising, the backing of a brand is no substitute for agreements between investors. Before committing any money, establish who will be the franchisee, what each person will contribute and how you will make decisions affecting the business.

1. Decide who will buy the franchise and sign the agreement

Having one person sign the agreement and receive money from other investors is not the same as forming a company to hold the franchise. In the first case, those contributing money do not automatically become franchisees or acquire direct rights against the franchisor. Their rights will depend on the legal arrangement they have entered into.

If a company will be the buyer, confirm that the franchisor accepts this structure. Some franchise models require you to set up an operating company or designate a person responsible for management. The buyer’s name must be consistent across the franchise agreement and the other transaction documents.

Before proceeding, prepare a summary setting out:

• Who will sign the franchise agreement.
• Who the business partners will be and what ownership stake each will hold.
• Who will act as the company’s legal representative.
• Who will manage the outlet and what authority they will have.

Being an owner, a legal representative and a manager are distinct roles, even if one person performs all three. Clarifying this prevents anyone from assuming that their investment entitles them to give instructions directly to staff or enter into commitments on the company’s behalf.

2. Distinguish between equity, loans and work

The Bogotá Chamber of Commerce recommends assessing your willingness to bring in business partners. This calls for a concrete discussion: what will each person contribute, and what will they receive in return?

An equity contribution is not the same as a loan from a business partner. The former is tied to their ownership stake and exposure to business risk; the latter creates a repayment obligation on agreed terms. Document the nature of each contribution with accounting and legal advice, rather than describing every inflow of money simply as an ‘investment’.

Do not confuse payment for work with returns on investment either. If one of the partners will manage the outlet, define their duties, time commitment and remuneration under an appropriate legal arrangement. This remuneration must be kept separate from any profits they may receive as an owner. The outlet’s sales revenue is not money that can be freely distributed.

Also agree on what will happen if additional funding is needed. Do not assume everyone will be able to contribute more. Set out how an equity injection will be proposed, who will decide whether to seek borrowing and what procedure you will follow if a partner does not participate. Any effect on ownership stakes must comply with the law and the company’s governing documents, rather than depend on an improvised penalty.

3. Align internal decisions with the franchise agreement

In Colombia, franchising is classed as an ‘atypical’ contract: it has no specific, comprehensive body of contract law governing it. The general provisions of the Commercial Code apply, as do those of the Civil Code where relevant. The operating company is also subject to the rules governing its legal form. If you choose a simplified joint-stock company, known locally as a sociedad por acciones simplificada (SAS), Law 1258 of 2008 is relevant.

You therefore need to consider two levels: what the partners can decide among themselves, and what the company undertakes to do under its agreement with the franchisor. An internal agreement does not, by itself, amend the franchise agreement.

For example, the partners might approve a change of manager, but the franchise agreement may require the designated operator to meet certain conditions. Similarly, a sale of shares may be subject to change-of-control clauses, even if the company that signed the agreement remains the same.

With professional advice, identify which decisions require the franchisor’s approval and which are purely internal. Pay particular attention to changes in ownership stakes, new investors joining and replacement of the person responsible for running the business. Avoid accepting obligations that disagreements between partners could later prevent you from fulfilling.

4. Document how you will make decisions when you disagree

It is not enough to agree that ‘everyone will decide everything together’. Allocate authority for day-to-day management and specify which matters will require special approval, such as borrowing, exceptional investments or managers’ remuneration.

Provide a mechanism for resolving deadlock, particularly if ownership stakes could result in tied votes. Also define what financial information each partner will receive and how often, without replacing any applicable statutory rights to inspect company records.

A lawyer should help you determine which rules belong in the company’s articles of association, shareholders’ agreements or other documents, taking account of their validity and scope. Not all private commitments have the same effect in relation to the company or third parties.

Practical conclusion: before buying, put in writing who signs, who contributes, who works and who decides. Then check those arrangements against the franchise agreement: you must be able to comply with both at the same time.