Franchise profitability in Colombia: a stress test

A profitable business does not always make a profitable franchise. The original outlet may benefit from a long-standing rental agreement, unpaid work by the founder or discounts that are difficult to replicate. Before bringing entrepreneurs into your franchise network, stress-test the economics of a single unit: calculate whether it can remain viable with all costs included and under less favourable conditions.

1. Rebuild the figures for a replicable unit

The aim is not to value the whole business or draw up a head office budget. It is to establish how much profit an outlet would generate when run by another entrepreneur using their own resources and meeting the franchise’s proposed financial obligations.

Start with verifiable records from the existing business and use periods that capture both peak and quiet seasons. Separate sales, refunds, product or service costs and operating expenses. Do not mix one-off income with regular revenue.

Next, adjust for advantages that the new operator may not enjoy:

• Owner’s work: include reasonable remuneration for the duties the owner performs, even if they currently take no salary.
• Owned premises: include an occupancy cost comparable to what a rented unit would face.
• Shared purchasing: allocate the costs attributable to the outlet and check whether the franchisee will have access to the same discounts.
• Informal support: account for transport, maintenance or administration currently provided by relatives or other businesses without charge.

This is not about making the figures look worse, but about removing hidden subsidies. Keep one column for historical figures and another for adjustments, explaining the reason and supporting evidence for each change.

2. Add the costs specific to franchising

Add the financial obligations the franchisee would take on to these normalised operating figures: royalties, advertising contributions, mandatory tools and any other proposed recurring payments. At this stage, you are not deciding what to charge, but checking the combined impact of your proposed charges.

Classify costs according to how they behave. Rent usually stays the same even when sales fall; expenditure on materials generally varies with sales. Some expenses increase in steps: handling more orders may require an entire additional shift.

Use this classification to calculate the operating break-even point. In a simplified calculation, divide fixed costs by the contribution margin percentage: the proportion of sales left after variable costs. Use a consistent basis and do not count a sales-based royalty twice.

Distinguish between three measures that are often confused:

• Operating profit or loss: what remains from trading after operating costs.
• Cash flow: the money available once the timing of receipts, payments, taxes and financing commitments is taken into account.
• Investment payback period: how long it would take to recover the initial outlay from available cash flows, not gross sales.

Seek accounting support to treat taxes, depreciation and financing correctly. An operation can show a profit yet still lack the cash to meet its obligations.

3. Test adverse scenarios and set decision criteria

Build a base case using evidence-backed assumptions, rather than the original outlet’s best month. Then test plausible adverse situations: fewer transactions, lower average transaction value, higher input costs or staffing expenses above expectations.

First, change one variable at a time to identify what has the greatest impact on the result. Then combine related factors. For example, falling sales accompanied by high wastage may erode margins more than a reduction in revenue alone would suggest.

For each scenario, record sales, contribution margin, operating profit or loss and cash flow. Also note possible responses: adjusting opening hours, reducing waste or reviewing the product or service range. Do not assume that every expense can be cut without affecting quality.

Before assessing the results, decide what would justify proceeding, redesigning the model or postponing the franchise offering. If viability depends on operating at full capacity from day one or on the franchisee working unpaid indefinitely, the model needs adjustment. Do not disguise that weakness by increasing hypothetical sales in the spreadsheet.

4. Use projections responsibly in legal terms

In Colombia, a franchise agreement is an ‘atypical’ contract: it is not governed by a comprehensive set of contract rules specific to franchising. The general provisions of Colombia’s Commercial Code apply, along with those of the Civil Code where relevant. Good faith also governs the pre-contractual stage, under Article 863 of the Commercial Code.

Always distinguish between historical results, adjustments and projections. A simulation is not a guarantee of profitability. If you share the analysis, identify the reference outlet, the period reviewed, the costs included and any assumptions that may not hold true at another location.

Do not present the draft decree on franchising published by Colombia’s Ministry of Commerce, Industry and Tourism in 2021 as legislation in force, or its proposed disclosure circular with a 20-working-day notice period as a general legal obligation.

Practical conclusion: before offering your franchise, insist that a unit can withstand its full costs and reasonably adverse scenarios. If the figures only work under ideal conditions, redesign first and market the franchise afterwards.