New Franchise Regulation under Government Regulation No. 35 of 2024
Authors
Overview
The Indonesian Government has introduced Government Regulation No. 35 of 2024 regarding Franchise (“GR 35/2024”) replacing the previous Government Regulation No. 42 of 2007 (“GR 42/2007”). This new regulation expands the scope of parties classified as franchise organizers, simplifies eligibility criteria, and introduces provisions to support the role of Micro, Small, and Medium Enterprises (“MSMEs”) within the franchising ecosystem.
This ARMA Update focus on the key points under GR 35/2024 for franchise organizers and newcomers to the franchise sector.
General Concept and Definition
Based on GR 35/2024, a franchise is defined as a special right granted to an individual or business entity, allowing them to operate a business system with predetermined criteria. This system is designed to market goods and/or services that have been proven successful and can be utilized and/or used by other parties through franchise agreements.
• Scope and Criteria for Franchise
The previous regulation governed the use of franchises in Indonesia. GR 42/2007 did not recognize the classification of sub-franchisors and sub-franchisees.
Under GR 35/2024 the classification of franchise organizers is broadened, including: (i) franchisors, both domestic and foreign; (ii) sub-franchisors, both domestic and foreign; (iii) franchisees, originating from either domestic or foreign franchises; and (iv) sub-franchisees, originating from either domestic or foreign franchises.
To be qualified as a franchise, certain criteria must be met:
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Criteria |
Remarks |
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Established a system
|
Typically, in the form of Standard Operating Procedures (“SOP”), covering several aspects such as human resource management and marketing strategy.
This system must be documented in writing and provided to the franchisee. It must be easy to implement, offering clear guidelines on work arrangements, and cooperation between the franchisee and franchisor. |
|
Profitability
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Businesses must operate for at least 3 (three) consecutive years. Financial statements for the past 2 (two) years must reflect a profit, audited by a public accountant, and include an unqualified opinion. MSMEs are excluded from this criterion. |
|
Registered Intellectual Property (“IP”) |
IP includes trademarks, copyrights, patents, industrial designs, and others. |
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Ongoing support
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Support in this context includes training, operational management, promotion, market research, market development, and other forms of assistance. |
• Prospectus Requirement
Under GR 35/2024, franchisor (or sub-franchisor) must provide a franchise offering prospectus to potential franchisees (or sub-franchisees), containing detailed information about the franchise opportunity. The prospectus must be provided at least 14 calendar days before signing the franchise agreement. The prospectus must include:
- identity data of franchisors or sub-franchisors;
- business legality of franchisors or sub-franchisors;
- history of business activities;
- the organizational structure of franchisors or sub-franchisors;
- business systems;
- financial statements for the last 2 (two) years;
- number of franchise business outlets of;
- list of franchisees or sub-franchisees;
- rights and obligations of franchisors or sub-franchisors and franchisees or sub-franchisees; and
- intellectual property certificate or intellectual property registration letter.
• Business License for the Franchise
Before entering into a franchise agreement (for the franchisor or sub-franchisor) or commencing business activities (for the franchisee or sub-franchise), it is mandatory to have a permit in the form of a Franchise Registration Certificate (Surat Tanda Pendaftaran Waralaba – “STPW”), which applied through the Online Single Submission(“OSS”) system.
Franchisor or franchisee that does not have an STPW is prohibited to use the term "franchise" (waralaba) for their business; otherwise, they will be subject to administrative sanctions in the form of a written warning and/or temporary cessation of business activities.
• Franchise Agreement
A franchise business operates under a solid foundation established by a franchise agreement, which is crucial for both franchisors and franchisees. This agreement serves as the legal document that outlines the terms and conditions governing the franchise. The Franchise Agreements shall at least contain the following provisions:
- name and address of both franchisors and franchisees;
- IP;
- business activities;
- business systems;
- rights and obligations of the party;
- assistance, facilities, operational guidance, training, and marketing provided by franchisors or sub-franchisors to franchisees or sub-franchisees;
- business area;
- guarantees from franchisors or sub-franchisors to franchisees or sub-franchisees to obtain compensation and/or granting rights to franchise in the event that the franchisors or sub-franchisors terminate their business activities;
- term of agreement;
- procedures for the payment of franchise fee;
- ownership and transfer of franchise ownership;
- disputes settlement;
- procedures for the extension and termination of the agreements;
- guarantees from franchisors or sub-franchisors to continue in performing their obligations to the franchisees or sub- franchisees; and
- number of outlets to be managed by franchisees or sub-franchisees.
The franchise agreement may also contain clauses on the granting of rights for franchisees to appoint sub-franchisees.
• Franchise Logo Requirement
The franchise logos must be installed or placed in an open and easily visible location at each franchise outlet, as well as at the head office. Non-compliance with this obligation will result in administrative sanctions in the form of a written warning, temporary cessation of business activities, and/or revocation of the STPW.
• Support for Domestic Product and MSMEs
All franchisors, except for foreign franchisors, must use domestic goods and/or services. This obligation also includes the requirement for franchisors to collaborate with MSMEs that provide supplies of goods and/or services in the local area. Franchisors are also required to give local MSMEs the opportunity to become franchisees, provided that these MSMEs meet the necessary requirements.
Franchisees are also expected to prioritize the use of domestic goods and/or services in carrying out their business activities, as long as the goods and/or services meet the quality standards and/or requirements set by the respective franchisor. All business entities are encouraged to use locally processed raw materials where possible.
GR 35/2024 comes into effect as per 2 September 2024. Any STPW issued prior this date remains valid until its expiration.
Disclaimer:
This client update is the property of ARMA Law and intended for providing general information and should not be treated as legal advice, nor shall it be relied upon by any party for any circumstance. ARMA Law has no intention to provide a specific legal advice with regard to this client update.
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