Franchising in Colombia: how to assess royalty payments

A seemingly straightforward royalty can create significant differences between what you expect to pay and what you end up owing. Before joining a franchise network in Colombia, look beyond the percentages: check the calculation basis, minimum payments and when charges apply. The aim is to be able to reproduce every calculation without relying on verbal explanations from the franchisor.

1. Identify the formula and its contractual basis

Colombia’s Ministry of Justice explains that franchise payments may include an initial fee and recurring royalties, usually based on revenue or sales. This does not mean there is a statutory rate or a mandatory formula for every brand.

In Colombia, a franchise agreement is an ‘atypical’ contract: there is no specific, comprehensive statutory framework governing it. Validly agreed contractual terms apply, alongside the relevant provisions of the Commercial Code and, where appropriate, the Civil Code, including the requirement to act in good faith. Freedom of contract does not allow the parties to disregard mandatory legal rules.

The royalty clause must therefore specify whether you will pay a percentage, a fixed sum or a combination of the two. If there is a monthly minimum, clarify whether it replaces the percentage-based amount when that amount is lower, or is charged on top. These are different formulas and should not be left open to interpretation.

Also ask for other recurring charges to be identified separately. An advertising contribution or technology licence fee does not become a royalty simply because it appears on the same invoice. Keeping them separate allows you to check which obligation gives rise to each payment.

2. Define exactly which sales count towards the calculation

Expressions such as ‘total sales’ or ‘gross revenue’ may not be sufficiently clear. The contract should allow you to determine how every actual transaction at the outlet is treated, not just an ordinary sale paid for immediately.

Ask for a written definition that addresses the following, as relevant to your business model:

• Indirect taxes: whether they are excluded from the calculation basis and how they are identified.
• Discounts: whether royalties are calculated before or after discounts, and what happens when another party funds the reduction.
• Returns and cancellations: when they reduce the calculation basis and what supporting evidence is required.
• Sales through platforms: whether the calculation uses the value of the sale to the customer or the amount received after commission.
• Credit sales: whether they count when invoiced or when payment is received, and how non-payment is treated.
• Vouchers and advance payments: when they are included, to avoid counting them twice.

Do not assume that all these exclusions are automatic franchisee rights. They are matters to review and agree within the applicable legal framework.

It is also worth establishing which outlet is credited with digital orders when several locations are involved. For royalties to be calculated correctly, it must be clear which sales belong to your operation.

3. Check the impact on your cash flow

A sales-based royalty does not necessarily depend on whether you make a profit. You may have to pay it in a loss-making month. Similarly, if the liability arises when you issue an invoice, you could owe the royalty before receiving the customer’s money.

Request a sample royalty calculation covering representative transactions: direct sales, platform orders, discounts, a return and a sale awaiting payment. Ask your accountant to reproduce the calculation using only the proposed wording. If they need additional instructions, the clause still needs clarification.

Then test low, typical and high sales scenarios, without treating them as forecasts. Look at how the payment changes when a minimum applies, and how much cash remains after meeting your other obligations.

Also check when charges begin: on signing, opening or making the first sale. If there is an introductory reduction, insist on clear dates and conditions. For amounts subject to adjustment, identify the agreed index or mechanism, how often adjustments occur and when they take effect. Avoid accepting adjustments whose calculation method you cannot verify.

4. Agree on verifiable calculations and a correction process

The contract should set out the period covered by each calculation, the cut-off date, who prepares it, the supporting documents and the payment due date. Distinguish the obligation to report sales from the obligation to pay: they may have different deadlines.

Negotiate a procedure for raising discrepancies, reviewing supporting records and correcting charges. Define how credits in your favour will be applied and how returns relating to sales recorded in earlier periods will be documented. Do not assume that a discrepancy entitles you to suspend all payments unilaterally.

Ensure that any change to the rate or calculation basis follows an expressly agreed procedure. Keep royalty statements and their supporting records so you can check that the formula used matches the contract.

Practical takeaway: before signing, obtain a complete formula, a calculation you can reproduce and a correction procedure. If you cannot explain where each figure comes from, you do not yet know the true cost of the royalties.