Franchising in Colombia: budgeting for the franchisor’s head office

A profitable business does not guarantee a sustainable franchise head office. When franchising an existing business in Colombia, costs arise that the original outlet did not face: contract administration, franchise network coordination and operational monitoring. Before offering your first franchise, prepare a separate budget to answer one question: how will the head office fund its commitments if new franchise agreements take longer than expected to materialise?

1. Separate the outlet’s accounts from those of the head office

The company-owned outlet sells products or services to end customers. The head office manages the franchise model and fulfils the obligations undertaken towards franchisees. Even if both activities sit within the same company, they need separate management accounts so that their results are not confused.

First, identify shared resources: administrative staff, office space, systems, accounting and management time. Then allocate a reasonable share of each cost to each activity using a documented basis, such as hours spent or actual usage. You do not need to set up another company to separate the budgets in this way.

Organise head office expenditure into three groups:

• Set-up: legal advice, documentation of the business model and preparation of management tools.
• Recurring operations: payroll, platforms, administration and franchise network coordination.
• Support per outlet: travel, hands-on support and other tasks whose costs increase as outlets join the network.

Include the owner’s work, even if they initially take no payment for it. Otherwise, the budget will appear viable only because someone is contributing unpaid hours indefinitely.

2. Turn each commitment into an identifiable cost

The budget should be based on the activities the head office will actually need to carry out, not an overall figure chosen by instinct. Review your sales promises and draft contract, and translate each commitment into tasks, responsibilities and resources.

For each task, record:

• What triggers it and how often it occurs.
• How many hours it requires and who will carry it out.
• What external expenditure it involves.
• When payment is due and what evidence will confirm that the task has been completed.

For example, an on-site visit may involve transport, accommodation, preparation time and writing a report. Budgeting only for the fare understates the cost of fulfilling that commitment.

Also distinguish between existing capacity and additional capacity. One person may be able to support the first few outlets within their working hours, but eventually another hire will be needed. That increase is not always gradual: it may arise before recurring income is sufficient to cover it.

The result should be a costing sheet that helps you identify these step changes in capacity before committing to new outlets joining the network.

3. Test cash flow without relying on new agreements

Build a monthly cash flow forecast that separates income from new franchisees joining the network, recurring income and payments. This exercise is not about setting fees or royalties, but checking whether the expected funds will arrive in time to finance existing obligations.

Prepare an expected-growth scenario and another in which no new franchise agreements are signed during the period under review. Add situations such as late payments, higher travel costs or the need to recruit earlier than planned. Assumptions should be clearly visible and easy to adjust.

Do not mistake an upfront payment for money that is freely available to spend. Part of that payment may need to fund tasks that have not yet been carried out. Nor should you treat funds contractually earmarked for specific purposes as cash available for any expense.

Identify the largest cumulative cash shortfall and how it will be financed: your own funds, approved capital contributions or another assessed source. If the original business will subsidise the head office, document how much it can contribute and for how long. An ongoing, informal transfer conceals problems in both activities.

4. Link the budget to actual obligations in Colombia

In Colombia, a franchise agreement is an ‘atypical’ contract: it is not governed by a comprehensive, specific statutory framework. The parties’ valid agreements and general civil and commercial law apply. Articles 863 and 871 of Colombia’s Commercial Code establish duties of good faith during the pre-contractual stage and when entering into and performing contracts.

Budgetary difficulties therefore do not, in themselves, remove commitments already undertaken. Before signing, align the legal and financial reviews: every obligation should have someone responsible for fulfilling it and resources allocated to it.

The draft decree published by Colombia’s Ministry of Trade, Industry and Tourism (MinCIT) in 2021 should not be presented as legislation in force, nor used on its own to claim that a franchise offering circular must be provided twenty working days in advance.

Practical conclusion: do not start franchising simply because the outlet is profitable. First, check that the head office can fund what it has promised, even when it stops receiving income from new franchisees joining the network.