Franchise fees and royalties in Colombia: how to set them

Turning a Colombian business into a franchise means deciding how much to charge and what to provide in return. Copying another brand’s fees can leave the franchisor short of resources or place too heavy a burden on the franchisee. A sustainable franchise network needs charges that are easy to understand, backed by specific services and compatible with day-to-day operations. This guide explains how to design them before offering your first franchise unit.

1. Separate the initial franchise fee from recurring payments

The initial franchise fee pays for initial access to the business model and the agreed services provided when joining the network. Royalties are regular payments for the ongoing rights and services defined in the contract. Neither should become a vague catch-all that supposedly covers everything.

Prepare a matrix listing each service, who is responsible for it, when it will be delivered and which payment funds it. For example:

• Onboarding: premises assessment, initial training, opening support and tool configuration.
• Ongoing support: operational assistance, scheduled visits, process updates and quality monitoring.
• Separate charges: collective advertising, technology licences, additional training or exceptional travel.

Specify what is excluded. If the franchisee pays directly for fit-out work, stock or equipment, do not present the initial fee as though it includes those investments. You should also define what happens to onboarding costs if the opening is postponed or never takes place.

2. Calculate the cost of delivering what you promise

Start with the cost of onboarding one unit: staff time, training materials, travel, system installation and support. Distinguish expenditure specific to that opening from the wider investment needed to develop the franchise model.

Legal structuring and tool development may benefit several units. Trying to recover that entire investment through the first initial fee can distort the offer; ignoring it altogether is equally problematic. Set an internal approach to recovering these costs and check that it does not depend on continually selling new franchises.

For royalties, estimate the monthly cost of the support you have committed to providing and your team’s actual capacity. Include remuneration, tools and travel. Account for the founder’s time too: the fact that it does not currently generate an invoice does not mean it is free or scalable.

Use the pilot operation to measure the support effort required, not just the outlet’s performance. Record enquiries, visits and time spent resolving issues. This evidence helps you budget for support you can realistically deliver.

3. Choose a formula and test its effects

Royalties can be agreed as a fixed sum, a percentage of a defined calculation base, or a combination of the two. No single formula is universally better than the others.

A fixed sum makes forecasting easier, but becomes a heavier burden when business slows. A percentage adjusts to sales levels, although it requires verifiable records. A guaranteed minimum protects a certain level of income for the franchisor, but can put pressure on a unit’s cash flow during its start-up period.

Before choosing, model scenarios for opening, established trading and reduced activity. Check all of the following together:

• Whether the franchisee retains enough funds for payroll, rent, suppliers and working capital.
• Whether the franchisor can fund the promised support.
• Whether additional charges significantly change the total cost.

Do not confuse royalties with advertising contributions. If you set up an advertising fund, define its purpose, eligible expenditure, administration, reporting frequency and treatment of remaining balances. Clarify whether franchisees must also spend money on local advertising.

4. Turn the formula into verifiable payment rules

A clause that merely states ‘a percentage of sales’ leaves too many questions unanswered. Explicitly define how VAT, returns, discounts, credit sales, vouchers and transactions through delivery platforms are treated.

Determine when each transaction is recognised and how errors are corrected. Specify whether platform commissions are deducted from the calculation base: the money received in the bank does not necessarily equal the sales figure used to calculate royalties.

The contract should set out reporting, invoicing and payment dates; required supporting records; review mechanisms; and a procedure for disputing discrepancies. If fees are subject to adjustment, include an objective formula and state how often it applies, avoiding vague powers to make unilateral changes.

Ask an accountant to review the taxes, withholding requirements and invoicing rules applicable to each charge. The commercial name given to a charge does not, by itself, determine its tax treatment.

5. Fit the charges within Colombia’s legal framework

In Colombia, franchising is an atypical contract: there is no comprehensive franchise-specific law defining its elements and fees. As the Ministry of Justice explains on LegalApp, it is governed by the parties’ agreement and the general rules applicable to commercial contracts.

These include the Commercial Code and, where relevant, the Civil Code’s rules on obligations and contracts. Contractual good faith matters both when explaining charges and when implementing them. Tax and competition rules must also be observed, alongside Law 256 of 1996 on unfair competition. Freedom of contract does not allow parties to disregard mandatory legal provisions.

Practical conclusion: before setting fees, complete your service matrix, measure the costs and test the formula under different scenarios. Then have the figures and contractual clauses reviewed together: every charge should have an economic justification and a verifiable rule.