Franchise royalties in Colombia: how to define the calculation

When franchising an existing business, agreeing on a royalty ‘based on sales’ seems straightforward until returns, discounts or platform commissions come into play. The challenge is not simply choosing a percentage: it is ensuring that both parties calculate the same amount using the same data. A verifiable rule helps build trust within the franchise network and prevents recurring disputes over each calculation.

1. Separate royalties from other payments

Before drafting the formula, identify what each charge covers. The initial franchise fee pays for entry into the franchise and any agreed benefits or services. The ongoing royalty pays for the continuing rights and services defined in the agreement. Any advertising contribution should be kept separate from both.

Do not present these charges as interchangeable. If initial training is included in the franchise fee, explain what subsequent support the royalty covers and which additional services may be charged separately. This avoids duplicate charges and expectations of unlimited support.

You can structure the royalty as a fixed sum, a percentage of a defined base, or a combination of the two. The choice should reflect how the business operates:

• Fixed sum: makes payments easier to forecast, but does not automatically decrease when sales fall.
• Percentage: varies with the agreed calculation base and requires consistent information.
• Combined formula or minimum royalty: requires an explanation of when each component applies and whether the amounts are added together or compared with one another.

There is no legally prescribed royalty percentage for franchises in Colombia. Nor is it advisable to copy another brand’s rate without assessing the rights and services it pays for.

2. Define what is included in the calculation base

The term ‘net sales’ is not enough if each party interprets it differently. Draft a contractual definition that allows transaction records to be used to establish the figure on which the royalty is calculated.

At a minimum, answer these questions:

• Is the calculation based on invoiced sales, completed transactions or money actually received?
• Is VAT, known locally as IVA, excluded from the base?
• How are discounts, returns and cancellations deducted?
• Are deliveries and sales through third-party platforms included?
• Do intermediary commissions reduce the base, or are they treated as a franchisee expense?
• How are tips, gift vouchers and advance payments handled?

For example, a platform may collect payment for a sale and transfer a smaller amount to the outlet after deducting its commission. Calculating the royalty on the sale value or on the amount transferred produces different results. Neither basis should be assumed: it must be expressly agreed.

You must also avoid counting the same transaction twice, as could happen when a voucher is sold and its redemption is later recorded. Define the point at which the royalty becomes due and maintain an audit trail for the transaction. These calculation rules do not replace the applicable accounting or tax treatment.

3. Establish a reproducible month-end process

The formula needs a procedure. Specify the calculation period, the reporting deadline, who prepares the calculation and when payment is due. If the period is not monthly, the timetable should still be unambiguous.

Prepare a template showing the starting base, exclusions, adjustments, final base and applicable rate. Identify the sales report supporting each field and appoint a responsible person on each side. The franchisee should be able to reproduce the calculation without relying on a verbal explanation from head office.

Test the template using actual transactions from your existing business. Include a period with discounts, a return made after the period has closed, and sales for which payment was collected by third parties. The aim is to identify ambiguities before passing them on to another business owner.

Also agree on a correction mechanism: the deadline for raising discrepancies, the supporting records required and how subsequent adjustments will be applied. If a return relates to a sale on which the royalty has already been paid, it must be clear how that return is accounted for, without silently changing previous calculations.

4. Incorporate the rules into the Colombian agreement

In Colombia, franchising is an ‘atypical’ contract: it has no specific, comprehensive statutory framework. The general rules of the Colombian Commercial Code and relevant civil law provisions apply, alongside any applicable special legislation. Freedom of contract does not allow parties to disregard mandatory rules or the principle of good faith.

Colombia’s Ministry of Justice identifies the consideration payable — such as the initial franchise fee and royalties — as one of the elements that must be specified when structuring the agreement. There is no official rate or state-run calculation system that replaces the parties’ agreement.

Include the formula and its procedure in the agreement or in a schedule expressly incorporated into it. If you provide for adjustments to fixed amounts, specify the index, frequency and effective date. Avoid leaving financial changes subject to a vague reference in an operating manual.

Seek legal and tax advice to clarify invoicing requirements, applicable taxes and withholding obligations. Distinguish the contractual royalty calculation base from the final amount payable after these items have been accounted for.

Putting it into practice: before offering the franchise, give two people the same template and records. If they arrive at different results, the rule still needs refining.