Franchising in Colombia: reviewing personal guarantees

Buying a franchise through a company does not necessarily shield your personal assets from business risks. The franchisor, a bank or a supplier may ask you for additional guarantees that change your exposure. When investing in a franchise, reviewing these documents before signing is just as important as understanding the main agreement: you need to know who can pursue you for payment, what they can claim and for how long.

1. Identify which obligations you would take on personally

Start by gathering all the documents you are required to sign: the franchise agreement, schedules, promissory notes, letters of instructions, credit agreements and supplier agreements. Reviewing only the page showing the investment amount is not enough.

If you operate through a Colombian simplified joint-stock company (sociedad por acciones simplificada, or SAS), Law 1258 of 2008 provides, as a general rule and subject to statutory exceptions, that shareholders’ liability is limited to their capital contributions. However, that limit does not remove obligations you take on personally as a guarantor or debtor.

With a lawyer’s help, distinguish between these roles under Colombian law:

• Joint and several debtor (deudor solidario): the creditor can demand payment of the entire covered obligation from you without first having to seek payment from the company.
• Surety (fiador): you guarantee another party’s obligation. The scope of that guarantee and the defences available depend on the applicable rules and agreed terms, including any waivers.
• Aval guarantor (avalista): you guarantee payment of a negotiable instrument, such as a promissory note, under the specific rules governing those instruments.

Signing solely as the company’s legal representative does not, in itself, mean you are personally guaranteeing the debt. Nevertheless, check whether another clause or signature box also binds you in your personal capacity. The same person may be taking on two distinct roles without realising it.

2. Understand which Colombian rules apply

Colombia has no specific law comprehensively governing franchise agreements. As the Ministry of Justice explains in its guidance, a franchise agreement is an ‘atypical’ contract: one that is not specifically regulated as a distinct contractual category. Validly agreed terms and the relevant general provisions of the Commercial Code and Civil Code apply, alongside other rules depending on the transaction.

Nor is there a specific general requirement to provide a franchise disclosure document within a uniform statutory period before signing. This does not remove duties of good faith during negotiations or allow mandatory rules to be disregarded. Law 1429 of 2010, which concerns business formalisation and job creation, is not a franchise law.

For guarantees, it is important to identify the precise legal framework: the civil and commercial rules on obligations, suretyship and joint and several liability, and the Commercial Code rules on negotiable instruments where promissory notes or aval guarantees are involved.

The contract is not your only protection, but a poorly defined guarantee can considerably increase your liability. Do not assume that franchisees have a special right to withdraw or limit a guarantee after signing. These terms need to be assessed and, where appropriate, expressly negotiated.

3. Review the promissory note and its letter of instructions together

A promissory note can make it easier to recover a debt through the courts when it meets the legal requirements. Do not treat it as a mere administrative formality or accept assurances that it is ‘never used’.

Article 622 of the Commercial Code allows blank spaces in a negotiable instrument to be completed in accordance with the signatory’s instructions. If you are asked to sign a promissory note with blank spaces, insist on clear written instructions and keep copies of both documents.

Pay particular attention to:

• Obligations covered: identify the specific agreements and amounts or charges covered; avoid vague references to any present or future debt.
• Calculation of the balance: establish which supporting records will be used to calculate principal, interest and other legally recoverable amounts, deducting payments already made.
• Conditions for completing the note: specify which default allows the blanks to be filled in and how the payment due date is determined.
• Signatories’ identity and capacity: check who is signing on behalf of the company and who is putting their personal assets at risk.
• Discharging the guarantee: agree how cancellation and return of the relevant documents will be recorded when appropriate.

Also request a procedure for receiving a breakdown of the balance and raising discrepancies. Do not confuse that review with an automatic suspension of debt recovery: any such effect must be validly agreed.

4. Negotiate limits before putting your assets at risk

Propose clear, verifiable limits: a maximum amount, specified obligations and a defined duration. Ask for clarification on whether the cap includes interest and costs, and what happens to debts incurred before the guarantee expires.

You could also propose a gradual reduction in the guarantee based on a good payment and performance record, or its replacement with another form of security acceptable to the creditor. These are negotiable options, not automatic rights.

Ensure that renewals, additional outlets or amendments to the agreement do not extend your personal commitment without your express consent. If you sell your stake or stop managing the business, do not assume you are released: obtain a written release from the creditor.

Practical takeaway: before signing, prepare a table listing the creditor, document, obligation covered, limit, duration and conditions for release. If any entry remains unresolved, address it with independent legal advice before putting your personal assets at risk.