Franchising in Colombia: agreeing how the contract will end

Before buying a franchise in Colombia, it is worth understanding how the relationship could end, even if the business gets off to a good start. Poorly defined exit terms can leave payments, stock and other commitments outstanding after closure. Agreeing these terms at the outset helps protect your investment and avoids expectations that the contract does not support.

1. Distinguish between the grounds for termination

A contract reaching its expiry date is not the same as ending it early for breach or agreeing a mutually acceptable exit. Each situation can have different consequences. Ask for the draft to address them separately, rather than grouping them under a generic provision for ‘termination for any reason’.

In Colombia, franchising is an ‘atypical’ contract: there is no specific legislation establishing a uniform exit procedure. The terms validly agreed by the parties apply, alongside the general rules of the Commercial Code and the relevant civil law provisions on obligations and contracts. The contract must also be performed in good faith.

Nor is there a dedicated mandatory pre-contractual franchise disclosure regime that removes the need for this review. Receiving a sales prospectus does not mean your exit terms have been settled.

Ask your lawyer to identify at least the following situations:

• Expiry of the contract term without continuation of the relationship.
• Termination for breach by the franchisee.
• Termination for breach by the franchisor.
• Early termination without breach, if permitted.
• Termination by written agreement between both parties.

Do not assume you can walk away freely because sales are lower than expected. If you want that option, negotiate its terms explicitly. Nor should you assume that the franchisor must buy back the business or refund the initial franchise fee.

2. Review notice requirements and opportunities to remedy breaches

A useful clause should make clear what conduct triggers termination, who can invoke it and how notice must be given. Expressions such as ‘damage to reputation’ or ‘failure to meet standards’ need enough precision to avoid becoming grounds for termination that are impossible to anticipate.

For breaches that can be remedied, propose a procedure that includes:

1. Written notice identifying the obligation breached and the facts supporting the allegation.
2. A defined period to respond and, where appropriate, remedy the breach.
3. A mechanism for demonstrating and verifying that the breach has been remedied.
4. A final notice stating whether the relationship will continue or end.

This period should not be presented as an automatic statutory entitlement specific to franchises: it must be assessed against the contract and applicable law. Its length should be reasonable for the obligation concerned; correcting a report is not the same as repairing premises or equipment.

Also check what happens if the franchisor is the party in breach. The contract should set out how to raise a claim and what options are available if essential obligations are not met. A clause that only describes breaches by the franchisee leaves the exit procedure incomplete.

3. Define what must be paid and what happens to the assets

Ask for an illustrative financial settlement for an early exit, without treating it as a definitive quotation. The aim is to identify the items and calculation methods involved, not to accept an unexplained lump sum.

Separate obligations that have already accrued from charges associated with ending the contract early. Review outstanding royalties, invoices, advance payments, deposits and any agreed compensation. If the contract seeks to charge for future payments, request legal advice on the basis and scope of those charges and any potential overlap with other amounts claimed.

For stock and equipment, record the answers to these questions in writing:

• Who owns each asset?
• Is there a buy-back obligation, or merely the possibility of negotiation?
• How will products be valued, and what conditions must they meet?
• Who pays for transport, dismantling and removal of branded items?

A machine you own does not automatically become the franchisor’s property when the contract ends. Equally, owning products or materials does not give you an unrestricted right to continue using the brand. If selling off remaining stock is permitted, agree the timeframe, sales channels and branding conditions.

4. Prepare a documented final handover

Ending the franchise does not, in itself, terminate contracts with employees, landlords, suppliers or financial institutions. Draw up a separate list of commitments that must continue, be settled or be negotiated with third parties.

Agree a timetable for stopping use of the brand’s identifying marks, returning materials supplied to you and closing authorised access. Also establish how you will retain the accounting and business records you are legally required to keep, without improperly retaining another party’s confidential information.

Finally, propose a written closing record stating the effective termination date, assets handed over, acknowledged balances and matters still in dispute. Do not sign a statement confirming that all matters have been satisfactorily resolved if there are claims you wish to preserve.

Practical conclusion: before committing your money, check that you can explain when the contract ends, how notice of exit is given and which obligations survive. If any answer depends on a verbal promise, ask for it to be included in writing and reviewed by a lawyer.