New Franchise Regulatory Framework (Indonesia)

Franchise Criteria

Regulation 35/2024 revises and clarifies the criteria that must be met by franchisors/sub-franchisors for operating a franchise business:

1. it must have a business system that includes operating standards and procedures for human resources management, administration, operational management, standard operating methods, marketing strategy, design of the business premises, marketing strategy, hiring requirement, and business location selection. Such business system must be in writing and notified to the franchisee, have a clear structure, and should be easy to be taught and implemented. The business system must also be reflected in the franchise prospectus and the franchise agreement.
2. the franchise business has generated profits. Regulation 35/2024 deems a business to have already generated profits if the franchise business has been operating for at least for 3 (three) consecutive years; and its last 2 (two) years audited financial statements show that the business is profitable. This replaces the standard stipulated in the Previous Regulation that requires franchisors, not the business, to have experience for at least 5 (five) years.
3. it has registered or protected intellectual property. While the Previous Regulation allows the franchisee to operate the business regardless whether the intellectual property has been registered or is in the process of registration, Regulation 35/2024 has a stricter requirement which mandates that the intellectual property (including brands or trademarks, copyrights, patents, industrial designs and others) be registered and recorded/certified prior to the commencement of the franchise and such intellectual property must be valid and protected upon the signing of the franchise agreement; and
4. it provides continuous support to the franchisee. The continuous support can be in the form of training, operational management, promotions, research, market development, and others.

Creation of Franchise

The relationship between the franchisor and the franchisee is established with the execution of the franchise agreement. Unlike the Previous Regulation, Regulation 35/2024 stipulates a more detailed process for the creation of franchise, with the following changes:

Reporting Obligation

Under Regulation 35/2024, franchisors/sub-franchisors and franchisees/sub-franchisees are required to file annual reports on the implementation of franchise activity to the Ministry of Trade via Online Single Submission system.

The report shall include the following items:

1. number of franchisee/sub-franchisee;
2. number of franchise stores;
3. financial statements containing the balance sheet;
4. turnover;
5. consideration/price of the franchise;
6. information regarding the management of raw materials in Indonesia;
7. number of human resources;
8. status of the intellectual property rights; and
9. forms of continuous support received by the franchisee/sub-franchisee.

Failure to comply with this reporting obligation will result in the imposition of administrative sanctions in the form of written warnings, temporary suspensions of business activities and/or revocations of STPW.

Use of Domestic Products

Regulation 35/2024 requires all franchisors, except foreign franchisors, to utilize domestic goods and/or services as long as it fulfils the written quality standard stipulated by the franchisor/sub-franchisor. The franchisors and franchisees shall also cooperate with domestic SMEs for the sourcing of goods and/or services. The franchisors and franchisees shall also prioritize conducting the processing of raw materials domestically.

Conclusion

Regulation 35/2024 provides more detailed and comprehensive steps in securing and/or entering into a franchise relationship. It also promotes the domestic market and SMEs to be involved in franchise industry. The implementation of Regulation 35/2024 while introducing new compliance obligations is expected to create business fairness and legal certainty within Indonesia’s franchise industry.