Terminating a Franchise Agreement in Colombia

Before franchising an existing business, it is worth deciding how the relationship will end if it does not work out or reaches the end of its term. This is not about expecting failure: it is about protecting the business owner, the franchisee and customers. In the franchise sector, an orderly exit prevents a contractual disagreement from leaving an operation with no clear lines of responsibility.

1. Start with Colombia’s legal framework

In Colombia, a franchise agreement is an ‘atypical’ contract: there is no comprehensive, dedicated legislation setting out all its terms. As the Ministry of Justice explains on LegalApp, it is governed by the parties’ agreement and the rules applicable to commercial contracts. Freedom of contract does not allow the parties to disregard mandatory rules or the duty of good faith.

When designing the termination provisions, consider the Commercial Code and, where relevant, the Civil Code’s general rules on obligations, breach and liability. Andean Community Decision 486 is relevant to trade marks and trade secrets; Law 256 of 1996 addresses unfair competition. Where customer or employee information is involved, Law 1581 of 2012 on personal data protection must also be taken into account.

Do not confuse a regulatory proposal with a current legal obligation. The document on franchising published by Colombia’s Ministry of Trade, Industry and Tourism (MinCIT) in 2021 is a draft proposal. It should not, on its own, be used to claim that a franchise disclosure document must be provided twenty working days in advance. Nor is there a general requirement to register a franchise agreement with the Superintendence of Industry and Commerce (SIC) simply because it is a franchise. Any formalities that may apply to its industrial property components are a separate matter.

Ask a Colombian lawyer to review the termination mechanism before offering the agreement to prospective franchisees.

2. Distinguish between expiry, breach and an agreed exit

Avoid a generic clause allowing termination for ‘any breach’ without explaining the procedure. Draw up a matrix setting out each scenario, the evidence required and its consequences:

• Expiry of the term: specify the end date, how a decision not to renew must be communicated and what happens if the parties continue operating afterwards.
• Remediable breach: identify obligations where a failure can be put right, such as submitting an overdue report. Define the notice required, the period allowed to remedy the breach and how compliance will be verified.
• Serious breach: define conduct that substantially undermines the relationship, such as disclosing confidential information. The approach to these breaches should be legally reviewed, rather than assuming that any allegation permits immediate termination.
• Termination by agreement: provide for a closing document setting out the effective date, outstanding obligations and the scope of any mutual releases from liability.
• Early exit without breach: if this is to be permitted, specify the notice period, conditions and financial consequences, without creating disproportionate barriers to exit.

The agreement must also address breaches by the franchisor. For example, a failure to provide promised support needs a mechanism for raising a complaint and obtaining a response. A balanced relationship does not reserve all remedies for one party.

3. Turn the exit into a workable procedure

Prepare an exit schedule identifying responsibilities, dates and evidence of completion. Simply requiring the franchisee to ‘stop using the brand’ is not enough.

First, establish how decisions must be notified: authorised recipients, addresses, agreed communication methods and proof of receipt. Then define who will coordinate the closure and how each action will be documented.

The schedule should cover at least the following areas:

• Brand identity: removal of signage, uniforms, packaging and online references that could suggest an ongoing affiliation.
• Channels and access: management of profiles, accounts and tools according to ownership; revocation of access credentials without destroying records that must be retained.
• Confidential information: return or controlled deletion of materials, with justified exceptions for statutory retention requirements.
• Stock and equipment: identification of ownership, arrangements for remaining stock and the terms of any potential buyback. Do not assume that a buyback will be compulsory.
• Customers: responsibility for outstanding orders, advance payments, warranties and complaints, without using internal agreements to diminish consumer rights.

The customer database does not automatically transfer to the franchisor. Any transfer must comply with the purposes, authorisations and responsibilities applicable to the processing of personal data.

4. Settle accounts and plan for disagreements

Separate the operational exit from the financial settlement. Prepare a statement of account showing amounts due, outstanding invoices, advance payments and disputed items. Define which supporting records each party may review and the procedure for challenging them.

If you agree on contractual penalties, compensation provisions or post-termination restrictions, have their validity, scope and proportionality reviewed. A broad prohibition on working is no substitute for clearly defined protection of confidential know-how.

Set out a dispute resolution process: negotiation, possible conciliation and the competent court or arbitral tribunal, in accordance with a valid agreement between the parties. Assess the costs before including arbitration as a matter of routine.

Practical takeaway: before signing your first franchise agreement, run through a simulated termination with your team. If you cannot identify who gives notice, who looks after customers, how branding is removed and how accounts are settled, the agreement still needs work.