Accounting when franchising in Colombia: keeping the accounts separate

Before franchising a business in Colombia, check whether your accounting lets you distinguish how much your company-owned outlet generates from how much it costs to manage the franchise network. If everything is mixed together, a profitable trading operation can conceal a loss-making franchise head office. This guide explains how to organise that separation and what information to request from franchisees, without confusing their businesses with the franchisor’s.

1. Distinguish between activities before opening new accounts

Separating information does not necessarily mean incorporating another company or opening a bank account for each activity. The first step is to identify which operations need to be analysed separately within the existing structure.

Work with your accountant to draw up a framework that distinguishes between:

• Company-owned outlets: customer sales, purchases, staffing, rent and other costs for each unit.
• Franchise management: contractual revenue and the costs of administering, supporting and coordinating the network.
• Other activities: for example, manufacturing or distributing products to outlets, where applicable.

Cost centres and other accounting classification tools can help you obtain this information without creating additional legal entities. The right structure depends on the size and activities of the business.

Identify shared resources too. If someone works both in a company-owned outlet and on franchise management, establish a documented basis for allocating their cost, such as the time actually spent on each activity. Avoid arbitrary allocations that make one activity look profitable at another’s expense.

2. Apply Colombian rules without inventing special obligations

In Colombia, a franchise agreement is an atypical contract: there is no specific law comprehensively governing the relationship, nor a separate accounting regime for franchises. General commercial contract rules apply, along with civil law rules where relevant and the applicable accounting and tax obligations.

Article 19 of Colombia’s Commercial Code requires traders, among other duties, to keep proper accounts for their businesses in accordance with legal requirements and retain documents relating to their activities. The applicable technical accounting framework must be determined under Law 1314 of 2009 and its implementing regulations, including Decree 2420 of 2015, as amended.

Franchisees remain independent businesses. Their sales to the public do not automatically become the franchisor’s revenue simply because they use the same brand. Each party’s revenue recognition depends on the transactions it actually carries out and the relevant accounting framework.

Nor should a commercial report that adds together outlet sales be confused with consolidated financial statements. Sharing a brand does not, in itself, create an obligation to consolidate accounts; that assessment requires a review of control relationships and the applicable rules.

3. Define comparable reporting, not a single set of accounts

To understand how the network is performing, the franchisor can agree with franchisees on the regular provision of operational and financial information. However, the scope must be established in the contract: the franchisor should not assume unlimited access to a franchisee’s books or bank accounts.

Design a concise report with common definitions. It might include sales for the period, returns, discounts, cost of goods and main operating expenses. Specify whether figures include taxes, how voided transactions are recorded and which date determines the reporting cut-off.

The agreement should specify:

• Who prepares and receives the information.
• How often it is submitted and in what format.
• Which supporting documents may be requested to clarify discrepancies.
• How errors are corrected and updated versions identified.
• What the information may be used for and who may access it.

Do not impose an identical chart of accounts without assessing whether it is necessary. A mapping table linking each operator’s accounts to the reporting categories can make comparison easier while respecting their accounting arrangements.

Management reports do not replace the books, tax returns or financial statements that each business is required to prepare.

4. Test a full period-end close before rolling out the system

Before bringing franchisees on board, test the framework using an actual accounting period from the existing business. Separate the outlet’s results from the costs attributable to future franchise management, and identify which expenses are still estimates rather than actual expenditure.

Check that every figure can be traced to supporting documentation. Pay particular attention to internal transfers, shared expenses and purchases used across several activities: moving money between your own accounts does not create a sale.

Then prepare a period-end timetable assigning responsibility for recording, reviewing and correcting entries. Once franchisees are involved, keep their reports separate from the franchisor’s accounting records and compare only equivalent categories.

Practical takeaway: before offering your franchise, ask your accountant for three deliverables: a framework for separating activities, criteria for allocating shared expenses, and a regular report with clear definitions. This will allow you to assess each business without confusing the scale of the network with your own revenue.