In the ever-evolving business world, various strategies are implemented to expand market reach. One of the most widely adopted methods is franchising. Franchising allows a business to grow rapidly through a partnership between the business owner (Franchisor) and another party who operates the business using a proven concept (Franchisee).
As a business expansion strategy, franchising offers numerous advantages for both parties. The Franchisor can expand their business reach with more efficient capital and resources, while the Franchisee benefits from a tested business system and continuous operational support.
Regulations regarding franchising in Indonesia are governed by Government Regulation No. 35 of 2024 on Franchising and Minister of Trade Regulation (Permendag) No. 71 of 2019 on Franchise Management. These regulations cover franchise definitions, eligibility requirements for franchise businesses, licensing procedures, and penalties for businesses that fail to meet franchise criteria.
Definition of Franchising
According to Article 1, Paragraph (1) of Minister of Trade Regulation No. 71 of 2019 on Franchise Management, franchising is defined as follows:
“A special right owned by an individual or business entity over a business system with unique characteristics to market goods and/or services that have proven successful and can be utilized by other parties based on a Franchise Agreement.”
Advantages of the Franchise Business Model for Franchisors and Franchisees
Advantages for Franchisors:
- Expands business networks.
- Increases bargaining power with financial institutions such as banks.
- Enables faster market penetration.
- Generates revenue from franchise fees, royalties, and training costs.
- Achieves large-scale business growth with minimal capital investment.
- Develops the business with fewer human resources.
Advantages for Franchisees:
- Does not require extensive business experience, as the franchisor provides training.
- Easier and quicker to establish a business.
- Gains customer trust quickly due to the franchisor’s brand reputation.
- Receives management system support from the franchisor.
- Maintains control over business management.
- Operates with a tested Standard Operating Procedure (SOP) provided by the franchisor.
Criteria for a Business to Be Eligible for Franchising
To qualify as a franchise, a business must meet the following criteria under Article 4 of Government Regulation No. 35 of 2024 on Franchising:
- Has a structured business system.
- Has demonstrated profitability.
- Holds registered or certified intellectual property rights.
- Provides continuous support from the Franchisor and/or Master Franchisee to Franchisees and/or Sub-Franchisees.
- Has a Standard Operating Procedure (SOP) that covers at least the following:
- Human resource management
- Administration
- Operational management
- Standard operating methods
- Business location selection
- Business premises design
- Employee requirements
- Marketing strategies
Franchise Agreement Provisions
A Franchise Agreement is essential due to the long-term collaboration between the Franchisor and Franchisee. To ensure legal protection and certainty for both parties, the agreement must clearly define their rights, obligations, and responsibilities. This helps prevent potential disputes and ensures a fair and mutually beneficial business relationship.
Under Article 6 of Permendag No. 71 of 2019, the Franchisor must provide a Franchise Offering Prospectus to prospective Franchisees at least two (2) weeks before signing the Franchise Agreement.
At a minimum, a Franchise Agreement must include:
- Names and addresses of both parties.
- Intellectual property rights details.
- Business activities.
- Rights and obligations of the Franchisor and Master Franchisee (if applicable).
- Support, facilities, operational guidance, training, and marketing assistance provided by the Franchisor or Master Franchisee.
- Business territory.
- Franchise agreement duration.
- Payment terms.
- Ownership structure.
- Dispute resolution mechanisms.
- Terms for renewal and termination.
- Guarantee from the Franchisor or Master Franchisee to fulfill obligations to the Franchisee until the contract period ends.
- Number of outlets/business locations to be managed by the Franchisee or Master Franchisee.
Types of Franchise Operators
According to Article 4 of Permendag No. 71 of 2019, franchise operators are categorized based on the origin of the Franchisor and Franchisee:
Foreign Franchisor – A company or individual from abroad granting franchise rights to parties in Indonesia.
- Example: McDonald’s, KFC, and Starbucks, which originate from foreign countries and provide franchise rights to Indonesian entrepreneurs.
Domestic Franchisor – A company or individual from Indonesia granting franchise rights to other parties within the country.
- Example: Alfamart, Indomaret, and Es Teler 77, which are Indonesian brands that franchise to local entrepreneurs.
Master Franchisee of a Foreign Franchise – A foreign franchisee who then grants franchise rights to others in Indonesia.
- Example: An Indonesian company that acquires the franchise rights for Pizza Hut International and then sells franchise rights to other Indonesian businesses.
Master Franchisee of a Domestic Franchise – A domestic franchisee who subsequently grants franchise rights to others in Indonesia.
- Example: A Surabaya-based entrepreneur buys a Ayam Gepuk Pak Gembus franchise and later resells the franchise rights to a Medan-based entrepreneur.
Franchisee of a Foreign Franchise – An Indonesian entrepreneur who directly acquires franchise rights from a foreign company.
- Example: PT Rekso Nasional Food holds the franchise rights for McDonald’s Indonesia from McDonald’s International.
Franchisee of a Domestic Franchise – An entrepreneur acquiring a franchise from a domestic franchise operator.
- Example: A businessperson purchases a Kebab Baba Rafi franchise and opens a new outlet.
Sub-Franchisee of a Foreign Franchise – A party obtaining franchise rights from a franchisee who had previously acquired them from a foreign franchisor.
- Example: A Jakarta-based entrepreneur buys a Chatime franchise from an Indonesian Master Franchisee who previously acquired rights from Taiwan.
Sub-Franchisee of a Domestic Franchise – A party acquiring franchise rights from a franchisee who had obtained them from a domestic franchisor.
- Example: A Yogyakarta-based entrepreneur buys a Bakso Malang Cak Man franchise from a Jakarta-based franchisee, who originally obtained it from Surabaya.
Franchise Licensing Procedures
To obtain a franchise license, entrepreneurs must apply for a Franchise Registration Certificate (STPW) via the Online Single Submission (OSS) system, integrated with the Directorate General of Domestic Trade, Ministry of Trade of Indonesia. Required documents include:
- Company Establishment Deed
- Ministry of Law and Human Rights Approval Decree
- Deed of Amendment (if any)
- Taxpayer Identification Number (NPWP)
- Company Leader’s Identity
- Company Domicile Certificate
- Business Identification Number (NIB)
- Business License
- Franchise Offering Prospectus
- Franchise Agreement
- Intellectual Property Registration Proof
- Employment Data
- Product and/or service information
Sanctions for Non-Compliant Franchise Businesses
If a business markets itself as a franchise but does not meet the criteria, it may face administrative sanctions, including revocation of its business and/or operational license. This is regulated under Article 24 of Government Regulation No. 35 of 2024 and Article 32 of Permendag No. 71 of 2019.
Conclusion
Entrepreneurs can establish franchise agreements with brands from Indonesia or abroad as long as they comply with Permendag No. 71 of 2019. Businesses can seek franchise license consultation through PNPC at +62 877 7926 0613 or info@pnpclawyer.com.