Franchise advertising funds: rules for Colombia

When a business starts franchising, pooling advertising contributions can help build a shared brand. However, collecting money without explaining who makes decisions, which expenses are permitted and how accounts will be reported can undermine trust. Before setting up a fund, the franchisor should establish management rules that enable its franchise network to understand where the money goes and assess how it is used.

1. Define the purpose and distinguish between expenses

The first step is not to set a contribution percentage, but to specify what the fund is for. A brand awareness campaign, a seasonal promotion and customer acquisition for an individual outlet serve different objectives. The agreement should explain which of these will be financed through pooled contributions.

Prepare a list of eligible expenses, for example:

• Production of photographs, videos and creative materials for shared campaigns.
• Purchase of advertising space and digital advertising.
• Agency fees for work expressly covered by the fund.
• Tools for running or measuring shared campaigns.

Define exclusions too. Advertising aimed at selling new franchises directly benefits the franchisor’s expansion and should not be confused with promoting the outlets’ products or services. If it is to be financed through pooled contributions, this must be expressly identified and agreed, rather than hidden within a general category.

Also clarify whether the fund will cover administrative costs. Avoid deducting central team staff time, commissions or overheads without a pre-agreed, verifiable rule.

2. Put the rules in the agreement, not just in a presentation

In Colombia, a franchise agreement is an ‘atypical’ contract: there is no comprehensive, dedicated law governing it. The terms agreed by the parties are supplemented by the general provisions of the Commercial Code and, where applicable, the Civil Code. Freedom of contract does not remove the duty of good faith or allow mandatory legal provisions to be disregarded.

Depending on the activity and campaign, relevant legislation also includes the Consumer Protection Statute, Law 1480 of 2011, particularly its provisions on information and advertising, and Law 256 of 1996 on unfair competition. An industry association’s code is not equivalent to legislation, although commitments incorporated into the agreement may create obligations between the parties.

The draft decree on franchising published by Colombia’s Ministry of Trade, Industry and Tourism (MinCIT) in 2021 must not be presented as legislation in force, or used to claim that a franchise offering circular is mandatory and subject to a statutory period of twenty working days.

For the fund, include a schedule to the agreement setting out:

• Who manages the money and who approves the budget.
• What company-owned outlets contribute, if they participate.
• Which expenses are authorised and how they are documented.
• How often reports will be provided.
• How balances, shortfalls and changes to the use of funds will be handled.

The existence of the fund does not, in itself, mean that a fiduciary arrangement (fiducia) or a legally separate pool of assets (patrimonio autónomo) has been created. Describe the actual structure and seek legal and accounting advice on its treatment, invoicing and taxation.

3. Make decision-making transparent and set realistic expectations

A pooled fund does not guarantee that each outlet will receive advertising equivalent in value to its contribution. A brand campaign may benefit several outlets indirectly, while a local promotion concentrates results in one city. This distinction should be explained before contributions are collected.

Define allocation criteria, such as market presence, campaign objectives, seasonal priorities or launch requirements. If campaigns will support new openings, clarify when they may use pooled resources and when they must be funded from the new franchisee’s own budget.

You can establish an advisory committee with franchisee representatives. Specify whether it makes recommendations or decisions, how its members are selected and how its meetings are recorded. Do not promise binding franchisee participation if the franchisor will retain full decision-making authority.

When appointing an agency connected to the franchisor, disclose that relationship and document the selection process and pricing. This reduces the risk of a legitimate purchase appearing to be an unjustified transfer of funds.

4. Report on spending, results and balances

Prepare a regular report that allows budgeted and actual spending to be compared. It should show the opening balance, contributions received, expenses by category, outstanding commitments and the available balance. Keep separate records so that movements in the fund can be tracked without confusing them with royalty income.

Accompany the accounts with relevant results: campaigns delivered, reach, enquiries or conversions where these can be measured. Distinguish between advertising metrics and verified sales; do not automatically attribute all growth to the campaign.

Establish a procedure for requesting clarification and inspecting supporting documents, while protecting personal data and confidential information. Also define what happens to unused funds at the end of the reporting period: do not assume they can become the franchisor’s income.

Practical takeaway: before collecting the first contribution, have the contractual schedule, budget and reporting template ready. A well-managed fund starts with clear rules, not promises of sales.