Franchising in Colombia

In Colombia, franchising is an atypical contract, as it is not regulated by a specific rule, but by general mandatory provisions of the Civil Code, the Commercial Code, the Code of Ethics for Franchises, and commercial uses and customs.

Accordingly, the parties wishing to enter into a franchise agreement are free, within the limits of the common good, to develop the contract based on the autonomy of private will, and according to the needs and interests that the parties have in the business. However, although there is ambiguity regarding the obligations, responsibilities, and other conditions in the franchise agreement, in Colombia the Code of Ethics was developed, the High Courts have established certain precepts through their jurisprudence, and entities have been created, such as the Colombian Chamber of Franchises – COLFRANQUICIAS – to promote the study of franchising in all its aspects.

Thus, franchising is developed through a contract whereby a person takes advantage of the experience of an established company or brand to exploit it. This contractual agreement is composed of a party called the franchisor, who grants to another party called the franchisee the license to use a trademark for commercial exploitation, as well as the methods, procedures, and technology in exchange for a financial amount established according to the interests of the parties. Thus, franchising is a competitive advantage that reduces the risk of starting an economic activity individually.

Now, Colfranquicias has defined this atypical contract as a business expansion model, through which a company is able to conquer and enter new markets by granting other entrepreneurs the licensing of use of a trademark, delivering the know-how and knowledge of its business in exchange for a financial consideration[1].

In the formation of the franchise agreement, the Code of Ethics prepared by Colfranquicias has stipulated some obligations of the franchisor and the franchisee, including:

1. Obligations of the franchisor:

• Have successfully operated a business concept for a reasonable period of time and, at least, one pilot unit before launching the franchise network.

• Be the owner, or have legal rights to use the trade name, trademark, logos, and other intellectual property rights that identify its franchise system.

• Provide its franchisees with:

– The operational, technical, and commercial manuals of the business to be franchised.

– The training and commercial and/or technical assistance that the franchisee requires during the entire term of the contract, under the conditions provided in the respective franchise agreement.

1. Obligations of the franchisee:

• Dedicate its efforts to achieve the successful growth of its franchise business.
• Consolidate the trademarks and other intellectual property rights that identify the franchise.
• Provide the franchisor with operational and financial data to guide effective management.
• Not disclose the know-how to third parties and not make available to third parties the operational, technical, or commercial manuals, or confidential documents.

According to the above, apart from the Code of Ethics as a general rule, we also have uses, customs, and foreign rules that allow the development of regulations in our Colombian legislation to regulate the franchise agreement.

In this sense, although the franchise agreement is not regulated in our legislation, the legal framework offers guidelines that allow filling the gaps for the preparation and execution of this type of contract. The lack of regulation is not an obstacle to the development of a franchise, since it offers economic advantages and risk reduction in commercial activity.

Today, franchises in Colombia have become one of the most interesting bets for entrepreneurship and for those who wish to start a commercial project with lower risks, since they have the backing of a proven and positioned brand in the market. This has been mentioned by Dinero magazine, since according to figures, of the 450 existing brands in Colombia, 247 are national and 196 are foreign – according to Colfranquicias – which are concentrated, with greater force, in cities such as Bogotá (50%), Medellín (12%), Cali (6%), Barranquilla (4%), and Bucaramanga (3%)[2].