Franchises in Colombia: checking profitability claims

A sales presentation may promise a quick return on your investment without explaining how it was calculated. Before buying a franchise in Colombia, turn every financial claim into something you can verify. In franchising, an informed decision means distinguishing between historical results, projections and contractual commitments: they are not the same and do not offer the same level of certainty.

1. Establish what the advertised profitability means

If you are told that the business is ‘profitable’ or that ‘you will recoup your investment quickly’, ask for a written definition. The figure could refer to gross margin, operating profit or the cash ultimately available to the owner. Treating these concepts as interchangeable can lead to a poor decision.

Ask for each financial claim to specify:

• The measure used: sales, profit, cash flow or payback period.
• The period covered: specific months, a full year or a future estimate.
• The investment included: which outlays are included and which are excluded.
• The expenses deducted: the manager’s pay, royalties, taxes, financing costs and other relevant items.
• The source: records from existing outlets or assumptions used in a financial model.

Be particularly careful to distinguish between recouping your investment and breaking even. Covering operating expenses does not mean you have recovered the money spent on opening the business. Nor does an accounting profit necessarily mean there is cash available to withdraw.

Also ask whether the calculation assumes that you will work without pay. If you need to employ someone to perform those duties, the advertised profitability may not reflect your circumstances.

2. Check whether the results are representative

One outstanding outlet does not demonstrate what every buyer will achieve. Ask how many outlets underpin the presentation, which are company-owned and which are franchised, how long they have been open and why they were selected.

Company-owned outlets may operate under different conditions: they may not bear the same internal charges, may share administrative staff or may receive support that will not be available to you. Ask for an explanation of the adjustments needed before applying their results to a franchised business.

It also matters which businesses were excluded from the analysis. A sample consisting only of successful outlets can conceal difficulties. Request aggregate information on openings, closures and outlets that have yet to achieve the advertised results, without demanding other people’s personal data or trade secrets.

To review the evidence, suggest the following process:

1. Obtain anonymised results from outlets comparable in format and length of operation.
2. Establish how the figures were obtained and which documents support them.
3. Ask an independent accountant to examine their consistency and comparability.
4. Record the differences that prevent those figures from being applied directly to your proposed business.

Confidentiality may justify restrictions on access, but it does not make an unsupported figure sufficient evidence. If you receive only promotional charts, treat the results as sales claims that still need to be verified.

3. Understand what Colombian law requires

In Colombia, a franchise agreement is an ‘atypical’ contract: there is no specific law comprehensively governing the relationship, nor a mandatory pre-contractual disclosure document specifically for franchises. This does not mean that negotiations fall outside the law.

The general rules on obligations and contracts in the Commercial Code and, where applicable, the Civil Code apply. Article 863 of the Commercial Code requires parties to act in good faith, free from fault, during the pre-contractual stage and provides for liability for losses caused by breaching that duty. Its application depends on the circumstances and the available evidence.

Law 1429 of 2010, which concerns bringing businesses into the formal economy and generating employment, is not a franchise law. Nor is there a general requirement to register franchise agreements with the Chamber of Commerce under a system that certifies their financial projections. A business’s commercial registration does not validate a profitability claim.

Keep presentations, emails, versions of financial models and written responses. Do not assume that returns below the projections automatically entitle you to compensation: the claims made, their basis, the parties’ conduct and the alleged loss will need to be examined.

4. Use the clarifications to inform your purchase decision

Create a record for each significant claim: the statement, who made it, the date, the supporting evidence received and any outstanding questions. Ask the franchisor to confirm whether it is a historical figure, an estimate or an obligation they agree to undertake.

Review with your lawyer any clause stating that you received no financial promises or made your decision without relying on sales information. If that statement does not reflect what happened, ask for it to be corrected before signing. Documenting a projection does not, by itself, turn it into a guarantee of results.

Finally, commission an independent financial model using lower sales, higher expenses and a longer payback period. The aim is not to predict the future, but to test how much your decision depends on optimistic assumptions.

Practical conclusion: do not buy into a profitability figure. Establish what it measures, check the supporting evidence and put its limitations in writing before committing any money.