Franchise Agreement in Colombia: What It Is and Key Clauses

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A franchise agreement is an agreement under which the franchisor allows the franchisee to replicate a business model, use certain assets (typically including a trademark) and access its know-how in exchange for the agreed consideration. To structure a franchise properly and securely, the business must be capable of being replicated and the rights in the trademark to be licensed must be adequately protected.

In Colombia, franchise agreements are considered atypical or innominate contracts, as there is no comprehensive statutory framework establishing all of their required terms. For this reason, careful drafting is particularly important to clearly define the parties' rights, obligations, controls and liabilities.

What is a franchise agreement?

A franchise agreement is an agreement under which one party, known as the franchisor, authorizes another party, known as the franchisee, to operate a business model subject to specified terms and conditions. It commonly includes authorization to use a trademark, the transfer of technical and commercial know-how, and the obligation to comply with standards designed to preserve the consistency of the business.

In return, the franchisee will typically pay an initial franchise fee, ongoing royalties or other forms of consideration established in the agreement.

Who are the parties to a franchise agreement?

The franchisor

The franchisor is the party that allows another person or company to replicate its business model. The franchisor will generally authorize the use of its trademark, transfer its know-how, establish operating standards and provide assistance aimed at preserving the identity and consistency of the franchise system.

The franchisee

The franchisee is the party that acquires the contractual right to operate the business model subject to the conditions established by the franchisor. In consideration for those rights, the franchisee will normally be required to make the agreed payments, use the trademark properly, comply with operating manuals and standards, and perform the other obligations set out in the agreement.

How can you determine whether a business can be franchised?

Once a business reaches a certain level of maturity, many business owners consider franchising as a means of expanding into new geographic markets without directly developing and operating each new location themselves.

Two conditions are particularly important when structuring a franchise:

A replicable business model: the business model should be capable of being reproduced while maintaining sufficiently consistent standards in areas such as products or services, processes, operations, customer experience and quality.
Protection of the trademark identifying the business: where the franchise includes a trademark license, the franchisor must hold the rights it intends to grant to the franchisee. In Colombia, the exclusive right to use a trademark is acquired through registration with the Superintendencia de Industria y Comercio - SIC.

Can a franchise operate without a registered trademark?

A registered trademark is not merely an ancillary element of a franchise. Where the operation of the business involves the use of a trademark, the franchisor must have the legal authority to authorize its use. Otherwise, the franchisor may be purporting to grant the franchisee a right that it is not legally entitled to grant.

The Superintendencia de Industria y Comercio - SIC has expressly highlighted the importance of industrial property rights in franchise agreements.

This issue may have particularly serious consequences where a person offers a franchise while leading a prospective franchisee to believe that it will obtain the legitimate right to use a registered trademark, even though the purported franchisor does not own that trademark or is not authorized to license it. Depending on the specific circumstances, the representations made and the existence of deception intended to obtain an economic benefit, the conduct could potentially be assessed under the criminal offense of fraud. However, the mere absence of a trademark registration does not, in itself, automatically constitute fraud; any such determination necessarily depends on the particular facts and applicable legal elements of each case.

Accordingly, before offering or acquiring a franchise, it is advisable to verify the identity of the registered trademark owner and the goods or services for which the trademark is protected. If the trademark has not yet been protected, you may review our trademark registration services in Colombia.

What should a franchise agreement cover?

The terms of a franchise agreement must be tailored to the characteristics of each business model. However, a properly structured franchise agreement will generally address, among other matters, the following:

Trademark license

The agreement should identify the trademark that the franchisee is authorized to use and define the scope of the license, including its territory, term, covered goods or services and the conditions governing use of the trademark.

Transfer of know-how

The franchisor should determine which knowledge, methods, procedures, manuals and commercial experience will be transferred to the franchisee so that it can properly replicate the business model. The agreement should also establish the conditions under which such information may be used.

Initial investment and franchise fee

It is common for the parties to agree on an initial franchise fee. The agreement should also specify which party will bear the costs associated with premises, equipment, inventory, technology, permits, training and any other investments required to commence operations.

Royalties and other payments

The agreement should clearly establish any royalties or recurring payments payable by the franchisee, including the method used to calculate them, payment frequency and payment terms. Where applicable, it should also address other contributions relating to advertising, technology, training or services provided by the franchisor.

Territory and exclusivity

The agreement should define the territory within which the franchisee may operate and expressly establish whether any form of exclusivity will apply. It is also advisable to address the conditions applicable to new locations, online sales and other distribution channels that may affect the designated territory.

Operating and quality standards

One of the objectives of a franchise system is to provide customers with a consistent experience. The agreement should therefore establish the operating and quality standards with which the franchisee must comply, together with the franchisor's reasonable supervisory rights.

Confidentiality and protection of know-how

The franchisee may receive commercially valuable technical, operational and business information. The agreement should establish clear confidentiality obligations, restrictions on disclosure and rules governing the use of such information both during and after the contractual relationship.

Term, renewal and termination

The agreement should establish the term of the franchise, the conditions governing renewal, grounds for early termination and the consequences arising upon termination, particularly in relation to the use of the trademark, return of manuals, confidential information and the identification of the business premises.

Dispute resolution

The agreement should establish the mechanism applicable to disputes that may arise between the franchisor and franchisee, as well as the governing law and, where appropriate, the jurisdiction or alternative dispute resolution mechanism selected by the parties.

Who should draft or review a franchise agreement?

Franchising combines elements of contract law and intellectual property law, particularly in relation to trademarks, licensing, know-how and the protection of confidential information. Accordingly, before franchising a business or acquiring a franchise, it is advisable to conduct a comprehensive legal review of both the business model and the agreement that will govern the relationship between the parties.

A properly structured franchise agreement should protect both the franchisor's intangible assets and business model and the franchisee's investment and legitimate commercial expectations.

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