Franchising in Colombia: how to assess royalties

A seemingly low royalty can prove costly if it is calculated on revenue you never receive or includes minimum payments that are hard to sustain. Before joining a franchise network in Colombia, look beyond the percentages: check what you will be charged for, when the obligation arises and how you can verify the amount due. This guide focuses on turning the royalty clause into a clear, verifiable calculation before you sign.

1. Understand what depends on the contract and what the law requires

In Colombia, franchising is an ‘atypical’ contract: there is no specific law governing the relationship comprehensively. Colombia’s Ministry of Justice explains this in its guidance on franchise agreements. The general rules of the Commercial Code and Civil Code apply, alongside relevant industrial property provisions, such as Decision 486 of the Andean Community.

There is also no general obligation to provide a franchise disclosure document in a prescribed format or within a statutory timeframe specific to franchising. You can request one as a matter of transparency, but it does not replace a review of the contract and its schedules.

This does not mean that anything goes or that the contract is your only protection. Duties of good faith during negotiations and performance of the contract remain relevant. However, do not rely on the law to resolve an ambiguous royalty formula: ask for it to be defined in writing and have it reviewed by an independent legal adviser.

2. Define exactly which sales attract royalties

Terms such as ‘gross sales’, ‘total revenue’ or ‘outlet turnover’ are not enough on their own. Request a contractual definition accompanied by a worked example. The key question is: which items are included, and which are deducted before the royalty is calculated?

Check the following points explicitly:

• VAT and other taxes: clarify whether they are excluded from the calculation base and how they are identified in reports.
• Discounts and promotions: establish whether the calculation uses the price actually charged or the price before the discount.
• Returns and cancellations: specify when they reduce the calculation base and what supporting documentation is required.
• Sales through platforms: clarify whether the calculation uses the sale value before commission or the amount the business receives.
• Credit sales: distinguish between amounts invoiced and payments collected; you could owe royalties before receiving the money.
• Vouchers and gift cards: define whether they count towards the calculation when sold or when redeemed, to avoid being charged twice.

Do not assume that platform commission or returns are automatically deductible. Their treatment must be clear and consistent with the agreed formula. Ask your accountant to check that the formula can be reconciled with the invoicing system you will use.

3. Review minimum payments, tiers and changes

Alongside the percentage, there may be a fixed fee or a minimum royalty. Clarify whether the minimum replaces the percentage-based amount when that amount is lower, or is added to it. These are financially different obligations.

If rates are tiered by sales volume, check whether a new percentage applies to all sales in the period or only to the portion above the threshold. Also request rules for partial months, temporary closures and periods before opening.

Identify any power the franchisor has to revise rates. Is an objective formula used? When does it apply? How much notice is required? Do not leave a core financial obligation subject to a policy that can be changed without clear limits.

Also distinguish royalties from other charges. An additional technology, administration or licence fee should not appear for the first time on an invoice. Ask for a schedule identifying each charge and ruling out duplication.

4. Agree how to verify and dispute the calculation

The contract should allow you to reconstruct each charge: the period, calculation base, exclusions, percentage, adjustments and taxes applicable to the invoice. Agree reporting, invoicing and payment dates, along with a procedure for correcting discrepancies.

If the franchisor can audit your records, review the scope, advance notice, confidentiality provisions and who bears the cost. The audit should be relevant to verifying royalties and comply with applicable obligations concerning information and personal data.

Negotiate a reasonable period for challenging errors and a rule for paying undisputed amounts while a discrepancy is resolved. Do not assume that raising a dispute automatically defers the payment deadline: this must be agreed explicitly.

5. Run a sample calculation before signing

Request a worked example covering ordinary sales, discounts, returns and orders through platforms. Use clearly identified assumptions of your own, not sales promises. Repeat the calculation with lower trading volumes to check the effect of minimum payments.

Ask the franchisor to confirm the result in writing and verify that it matches the clause. If your accountant and the franchisor arrive at different figures, something still needs clarification.

Practical conclusion: sign only when you can reproduce the royalty calculation using the contract and a sales report, without relying on verbal explanations.