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Domestic and international franchise businesses have expanded rapidly as a way of investing in Indonesia. In this country, it is nearly impossible for you to go outside without seeing a franchise business, be it in F&B (McDonald’s, KFC, Starbucks Coffee), retail (Alfamart, Indomart), or beauty and personal care (Haircode, Kaizen).
However, the regulatory system around franchising is extensive and complex, which poses a challenge for business actors who want to grow through this route.
The following are some of the regulations regarding franchising in Indonesia:
- Government Regulation No. 42 Year 2007 on Franchising;
- Minister of Trade Regulation No. 53/M-DAG/PER/8/2012 Year 2012 on the Implementation of Franchises as amended by the Minister of Trade Regulation No. 57/M-DAG/PER/9/2014;
- Minister of Trade Regulation No. 68/M-DAG/PER/10/2012 Year 2012 on Franchising for Modern Store;
- Minister of Trade Regulation No. 58/M-DAG/PER/9/2014 Year 2014 on Partnership Development in Franchising for Food and Beverage Services
According to Indonesian law, franchising is defined as a special right owned by an individual or entity (the franchisor) over the unique characters of a business system which has been successful in promoting goods and/or services and (under a written franchise agreement) can be used by another party (the franchisee). 1
As part of the franchise agreement, franchisors are required to support the franchisee in developing the business. This may be through education and training for the franchisee and its staff members, supervision of operations for a certain period of time, or business or product development support.
Upon entering into a franchise agreement, the franchisor must also provide the franchisee with a franchise-offering prospectus. Such prospectus must include details on the business and the franchising parties, a history of business activities, financial statements, lists of franchisees, and the rights and obligations of the franchisor and the franchisee. 2
Moreover, franchisors must first submit a draft franchise agreement to the Ministry of Trade, to confirm that the agreement does not violate any local laws or regulations. Once it is approved, the franchisor may proceed to file an application and register their franchise-offering prospectus (in Indonesian) with the Ministry of Trade to obtain the franchise registration certificate (Surat Tanda Pendaftaran Waralaba).3
Other than a promising business model, the legal structure of franchise business can be an option for foreign investor planning to invest in Indonesia if their business restricted for foreign investment. The foreign investor may still run the restricted business by collaborating with local partners and entering into franchise agreements.
It should be noted that there are sanctions for both franchisors and franchisees in the event that they fail to comply with certain requirements. Such sanctions can be in the form of written warning, fines, and/or revocation of the franchise’s certificate of registration. 4
Therefore, it is important to have sound legal advice and representation when entering a franchise agreement, or in dispute situations related to franchised business. At Schinder Law Firm, we have the expertise and experience in assisting clients in establishing franchise businesses and have represented them in disputes. We have advised on business plans, reviewed prospectus documents, drafted franchise contracts, assisted in acquiring Franchise Registration Certificates, as well as represented franchisors and franchisees in franchise disputes.
1Article 1 (1) Government Regulation No: 42/2007.
2Somboon Earterasarun & Wulan Purnamasari, “Franchise Agreement Registration in Indonesia”, 2015.
3Article 12 (4) Government Regulation No: 42/2007.
4Article 16 (2) Government Regulation No: 42/2007.
Morales Sharoz Sundusing
Morales is a qualified Indonesian advocate. He specialises in litigation and other contentious matters. He has extensive experience in handling high profile corruption cases as well as general election disputes, i.e. 2014 Presidential Election, before the Indonesian Constitutional Court.