Franchises in Colombia: how to calculate the capital you need

The advertised price of a franchise does not always reflect the money needed to launch it and keep it running. Before joining a franchise network in Colombia, draw up your own budget covering start-up costs, operations and financing. This guide explains how to calculate your capital requirements and check them against the franchisor’s information before committing your savings.

1. Ask for financial information you can verify

Request a dated, written breakdown of the estimated investment, including what is covered, any exclusions and the assumptions used. A single headline figure will not tell you whether it includes taxes, fitting out the premises or pre-opening expenses.

Also ask what the sales forecasts are based on: do they come from company-owned or franchised outlets? New or established locations? Do they include businesses that have closed? Compare formats, locations, sizes and how long the outlets have been operating. The results of an established outlet will not necessarily reflect your own first few months.

In Colombia, a franchise agreement is classed as an ‘atypical’ contract: there is no specific law comprehensively governing this relationship, as the Colombian Ministry of Justice explains. The general rules of the Commercial Code and Civil Code apply, including the duty to act in good faith during negotiations and performance of the contract. Andean Community Decision 486 is also relevant to industrial property rights.

There is no specific general requirement to provide a franchise disclosure document in a legally prescribed format or within a prescribed timeframe. This does not remove the general duties of good faith. Ask for sufficient information and keep proposals, emails and versions of the budget; do not treat a forecast as a guarantee of profitability.

2. Separate the initial investment from operating expenses

Divide your budget into three sections to avoid omissions and double-counting:

• Entry and preparation: initial franchise fee, legal and accountancy advice, company formation, applicable administrative procedures, training and travel.
• Premises and set-up: fit-out, equipment, furniture, IT systems, opening stock, rental security deposits or guarantees where applicable, and pre-opening expenses.
• Operations: payroll and associated employment costs, rent, utilities, stock replenishment, royalties, advertising, insurance, maintenance, and payment processing or delivery fees.

For each item, identify who charges it, when it is payable, whether it includes taxes and what document supports the amount. Check the franchisor’s budget against supplier quotations and the actual terms and condition of the premises.

Pay particular attention to royalties and advertising contributions: these may be calculated on sales even while the outlet is losing money. Confirm the basis of calculation, minimum charges, payment dates and adjustments. Also ask about mandatory purchases, technology upgrades and future refurbishments: these are financial commitments that must form part of your assessment.

3. Calculate your cash needs until the business can sustain itself

Prepare a monthly cash flow forecast starting with the first payment you make, not the opening date. Record inflows when you expect to receive them and outflows when payments fall due. A sale for which you have not yet been paid cannot fund payroll.

Working capital covers the timing gap between receipts and payments. How much you need will depend on factors such as stock turnover, supplier payment terms and how long the business takes to generate sufficient sales.

Distinguish between three concepts:

• Operating break-even: the level of sales that covers the operating costs and expenses included in your calculation.
• Cash flow break-even: the point at which cash receipts cover cash outgoings, including financial obligations.
• Investment payback: the point at which cumulative cash flows recoup the capital invested.

These are not the same. An outlet can show a profit and still run out of cash.

Prepare a base-case forecast and a downside scenario allowing for a delayed opening, lower sales or higher costs. Use defensible assumptions, not arbitrary percentages. Identify the largest cumulative cash shortfall and add a contingency reserve with a clear rationale, without counting initial outlays twice.

4. Align the financing and contract with your budget

Compare the capital required with your own funds that are genuinely available and any confirmed financing. Keep your household reserve separate: you will need to cover personal expenses until the business can pay you.

If you apply for a loan, include interest, fees, insurance, repayments and possible interest rate changes. A grace period does not necessarily mean that no interest accrues. Assess whether you can service the debt in the downside scenario without relying on further borrowing.

Before paying a reservation fee or advance payment, record its purpose, refund conditions and what happens if you cannot secure financing or approved premises in writing. Do not assume these payments are refundable.

Ask an accountant to review the cash flow forecast and an independent lawyer to check the budget against your contractual obligations. Any significant financial promises should be clearly documented.

Practical conclusion: do not base your decision on the advertised franchise fee. Proceed when you can explain how much you need, when you will spend it and how you will fund a slower-than-expected launch.