Franchise Preliminary Agreements in Colombia: Advance Payments and Refunds

When a prospective franchisee wants to secure a place in a franchise network, accepting money may seem like the natural next step. However, taking payment before the final agreement is signed creates obligations and expectations that need to be clear. For a Colombian business beginning to expand through franchising, preliminary agreements deserve a dedicated procedure: what is being promised, what the advance payment is for and what happens if the deal does not go ahead.

1. Define the commitment you want to make

“Preliminary agreement”, “reservation” and “letter of intent” are not interchangeable labels. A document’s legal effect depends on its content and the commitments made, not simply its title.

Before drafting it, decide whether you want to record discussions, allow time to complete checks or commit the parties to entering into a franchise agreement later. If you intend to create a binding promise to enter into a contract, seek legal advice on the requirements and enforceability: a commercial template may not be sufficient.

The document should explain what the prospective franchisee may do at this stage. Making an advance payment should not automatically be interpreted as permission to use the brand, present themselves as a franchisee, open an outlet or receive confidential operational information.

Practical rule: describe both what is being granted and what is not yet being granted. Avoid phrases such as “franchise secured” if checks are still outstanding.

2. Apply Colombian law without confusing proposals with legislation

In Colombia, franchise agreements are classified as atypical contracts: they are not governed by a specific, comprehensive set of contractual rules. They are governed by the parties’ agreement and the applicable general rules, particularly the Commercial Code and, where relevant, the Civil Code. Freedom of contract does not allow parties to disregard mandatory legal provisions.

Article 863 of the Commercial Code is particularly relevant at this stage: during pre-contractual dealings, the parties must act in good faith and without fault, or face liability for the loss they cause. A document allowing either party to end discussions therefore does not, by itself, eliminate all potential liability.

The draft decree published by Colombia’s Ministry of Commerce, Industry and Tourism (MinCIT) in 2021 proposed a Franchise Offering Circular and a requirement to provide it twenty working days in advance. That proposal must not be presented as a current legal obligation. There is no generally mandatory disclosure period of this kind for franchises in Colombia; nor does this permit businesses to conceal relevant information or mislead prospective franchisees.

Membership of an association and compliance with its codes of conduct are not equivalent to registration on a state franchise register. Distinguish between legal obligations, applicable association commitments and the good practices you choose to adopt.

3. Explain what the money is for and when it will be refunded

Do not accept a “payment on account” without identifying its purpose. It may be an advance payment towards the initial franchise fee or payment for specific preliminary work. If it covers more than one purpose, separate the amounts and explain how each will be treated, with legal and accounting advice.

The agreement should specify:

• Who receives the payment: the company’s legal name, identification details and authorised bank account.
• What the payment covers: its purpose and any activities included.
• How it will be credited: how the money will be treated if the franchise agreement is signed.
• When it will be refunded: the circumstances, procedure and agreed deadline.
• What may be deducted: previously authorised expenses and how they must be evidenced.

Avoid declaring every payment “non-refundable” without examining the basis for doing so. Retaining money does not become legally valid simply because the document says it is.

As a contractual policy, you may agree to a full refund when the franchisor decides not to proceed for reasons of its own. If the prospective franchisee withdraws after authorising specific work, you may provide for different treatment of that cost, subject to legal review. These are matters to negotiate, not automatic legal rules.

4. Set a clear, verifiable endpoint for the preliminary stage

Set a deadline and objective conditions for deciding whether to sign the final agreement. Each condition should identify who provides the evidence, who reviews it and how the outcome is communicated. Avoid leaving the advance payment indefinitely subject to “head office approval”.

Maintain a file containing the signed agreement, proof of payment, expense authorisations and communications about conditions being met or either party withdrawing. Extensions should also be documented; silence should not operate as an ambiguous renewal of the reservation.

If the deal proceeds, record how the advance payment is credited under the final agreement. If it ends, document the final account, any justified deductions and the corresponding refund, without introducing improvised blanket waivers.

Practical conclusion: before taking payment, test three scenarios: the agreement is signed, the prospective franchisee withdraws and the franchisor decides not to proceed. If the document does not make clear what happens to the money in each case, it is not yet ready to use.