Franchising in Colombia: agreeing audit terms

Buying a franchise means accepting checks to maintain shared standards. But allowing a review of your business does not mean granting unrestricted access to its documents, premises or systems. In franchising, well-defined audit terms protect both the brand and the franchisee’s autonomy. Before signing, clarify their scope, costs and the procedure for resolving any problems.

1. Distinguish what is being reviewed and against which criteria

A clause allowing the franchisor to ‘inspect any aspect of the business at any time’ deserves scrutiny. Ask for a clear distinction between operational checks, sales checks and quality checks: each requires different information and methods.

For example, a visit to review how a product is prepared does not necessarily require access to all the company’s bank transactions. Similarly, checking the basis on which royalties are calculated requires relevant records, not indiscriminate access to businesses outside the franchise.

Request a simple table covering the following:

• Scope: which activity, record or standard will be reviewed.
• Criteria: which contractual obligation or procedure will serve as the benchmark.
• Evidence: which documents, observations or samples may be requested.
• Reviewer: who will carry out the review and how they will demonstrate their authority to do so.
• Outcome: how findings will be documented and who will receive the report.

Ask for a sample checklist too. Seeing it before you buy helps you estimate the administrative work involved and identify requirements that are not yet clear in the commercial proposal.

2. Understand the legal basis for oversight

In Colombia, franchising is an ‘atypical’ contract: there is no specific legislation establishing a comprehensive legal framework of its own. It is governed by the agreed terms and the applicable general rules, particularly the Commercial Code and, where relevant, the Civil Code. Good faith also guides the formation and performance of the contract.

Guidance from Colombia’s Ministry of Justice recognises that franchisees retain their independence and autonomy, although they must comply with agreed standards and procedures. The scope of audits therefore needs to be defined: neither unlimited powers for the franchisor nor a right for the franchisee to refuse all checks should be assumed.

Nor is there a general mandatory pre-contractual disclosure regime specifically for franchises equivalent to those found in some other countries. The draft decree published by the Ministry of Trade, Industry and Tourism (MinCIT) in 2021, which proposed a Franchise Offering Circular, should not be presented as legislation in force simply because it was published.

If an audit involves processing customers’ or employees’ personal data, Law 1581 of 2012 and its implementing regulations are relevant. A contractual clause does not replace data protection obligations. Seek legal advice to define the purposes of processing, access rights and respective responsibilities; where sufficient, use aggregated or anonymised information.

3. Agree visits, access and costs

Aim for a balance between effective checks and business continuity. Some unannounced quality checks may make sense, but this does not justify conducting every accounting review without notice or during peak trading hours.

Negotiate the following in writing:

• Notice periods for scheduled reviews and justified exceptions.
• Timing, expected duration and measures to avoid disrupting service.
• Conditions for remote access to systems and permissions to view information.
• Confidentiality obligations for employees, advisers and external auditors.
• Who pays for travel, professional fees and additional reviews.

Avoid an open-ended obligation to cover ‘all audit expenses’. If certain costs are passed on to the franchisee when a discrepancy is found, define how that discrepancy will be determined, which expenses are allowable and how they must be substantiated. Include your accountant’s and your team’s time when assessing the financial implications of buying the franchise.

4. Insist on a procedure for responding and putting things right

A review should not end with a verbal assessment. Propose a written report identifying the obligation assessed, the evidence and the finding. The franchisee should be able to submit explanations and documents before contractual consequences are imposed, without preventing justified urgent action in response to serious risks.

Distinguish between a minor issue, an accounting discrepancy and a failure that compromises safety. They do not all require the same response. Agree reasonable deadlines for corrective action, who is responsible and how resolution of each finding will be verified.

For technical or accounting discrepancies, consider an independent review and agree how the professional will be selected and who will bear the cost. Keep reports, responses and records of corrective action.

Practical conclusion: before buying, request a checklist and run through a mock audit with your accountant. Sign only when you can explain what the franchisor will review, how much it could cost you and how you can respond to its findings.