Franchise Agreement and Business in Indonesia

Franchise Agreement and Business in Indonesia

  • InCorp Editorial Team
  • 29 October 2024
  • 6 minutes reading time

By the laws of Indonesia, a franchise is a special right that a legal entity or an individual owns. The franchise business in Indonesia is a unique system that has shown effectiveness in promoting products and services. Individuals and legal entities can utilize this business model based on a franchise agreement.

Franchise Regulation in Indonesia

In Indonesia, franchising is primarily governed by two regulations: (i) Government Regulation No. 42 of 2007 on Franchising and (ii) Minister of Trade Regulation No. 71 of 2019 on Franchising Implementation.

Under these laws, a franchise is defined as a specific right owned by an individual or business entity to a business system with distinctive characteristics aimed at marketing goods and/or services proven to be successful. Others can utilize this system under a franchise agreement.

A franchise business must meet specific criteria to qualify. The business can only be legally classified as a franchise if these criteria are met. The criteria include:

  • Distinctive business characteristics
  • A proven track record of profitability
  • Documented standard operating procedures (SOPs) for goods and/or services
  • Business methods that are teachable and easy to implement
  • Ongoing support provided by the franchisor to the franchisee
  • Intellectual property rights registered or filed for registration in Indonesia

Franchising arrangements in Indonesia must be based on a franchise agreement governed by Indonesian law. Before entering such an agreement, the franchisor must register a franchise offering prospectus with the Ministry of Trade and obtain the Franchise Registration Certificate (STPW). Additionally, franchisors are required to:

  • Provide ongoing guidance to franchisees
  • Prioritize the use of domestic goods and services
  • Partner with small and medium-sized businesses, provided they meet the necessary criteria
READ MORE:

What are Franchising Agreements?

Every Indonesian franchise business operates under the terms outlined in its agreement, which requires franchisees to adhere to operational guidelines. Franchisors generally offer training, guidance, and support to help franchisees meet these standards.

Franchise agreements in Indonesia also define the fees and royalties payable to the franchisor. Additionally, they outline the franchisee’s rights to use and produce certain items that may be patented, copyrighted, or service-marked, which serve to identify the brand. These agreements typically include clear operational directions for the franchisee to follow.

What are the Top 3 Franchise Businesses?

Well-established fast food brands lead the best franchise business in Indonesia, each showing robust growth in outlets and sales.

McDonald’s (operated by Rekso Group) ranks first, expanding from 235 outlets in 2021 to 269 in 2022, with sales jumping from $303.6 million to $409.8 million.

Close behind is KFC (Fastfood Indonesia PT, Tbk), with 719 outlets in 2022, a slight increase from 713 in 2021, and sales growing from $345.8 million to $408.2 million.

Finally, Pizza Hut (Sarimelati Kencana PT, Tbk) holds a strong third position, increasing its outlets from 540 in 2021 to 562 in 2022, with sales rising from $238.7 million to $247.2 million.

These brands’ successful expansions highlight the demand and growth potential for franchise businesses within Indonesia’s fast-food sector.

READ MORE:

How to Start a Franchise in Indonesia

To start a franchise business in Indonesia, a franchisor must draft a franchise agreement and provide it to the franchisee at least two weeks before signing.

If the agreement is in English, it must be translated into Indonesian and certified for legal effectiveness. Both franchisor and franchisee must adhere to Indonesian health, consumer protection, the environment, education, intellectual property, and employment laws.

What are the Requirements to Set Up a Franchise Business in Indonesia?

Establishing a franchise business in Indonesia involves adhering to specific regulatory requirements to ensure fair practices, quality standards, and transparent operations. Here are the key steps and conditions to launch a franchise in Indonesia.

Registration and Certification

Before entering an agreement with a franchisee, the franchisor must register with the Ministry of Trade and obtain the Surat Tanda Pendaftaran Waralaba (STPW), the Franchise Registration Certificate.

Essential Information Covered in Franchise Agreements

The franchise agreement for your franchise business in Indonesia should include the following elements:

  • Business Details

This outlines business activities, areas of operation, names and addresses of both parties, rights and duties, types of intellectual property rights, agreement terms, facilities, and assistance.

  • Operational and Marketing Support

This includes details on marketing guidance and operational support from the franchisor to the franchisee, as well as payment structures, dispute resolution methods, and ownership rights.

  • Procedures for Agreement Management

It specifies the procedures for termination, renewal, expiration, rights of heirs, and change of ownership and clarifies that unilateral termination before the agreement expires is not permitted.

Pre-Agreement Disclosure Document

The franchisor is required to provide a disclosure document to the franchisee, which must include:

  • Proof of identity for the franchisor
  • Legal documentation for the franchise business
  • Business history and organizational structure of the franchisor
  • Audited financial statements and balance sheets from the past two years
  • List of franchise outlets and detailed rights and obligations of both franchisor and franchisee

Oversight and Compliance

The franchisor should provide regular assistance and supervision to ensure the franchisee adheres to business systems, standards, and requirements.

The franchisor may also require the franchisee to develop a business plan and submit regular business development reports that align with the franchisor’s standards.

Guide to Doing Business in Jakarta

Mailchimp Free eBook Indonesia Business Insight

Launch Your Franchise Business in Indonesia with InCorp

Indonesia presents vast opportunities for global entrepreneurs and investors seeking to establish a franchise business. As a bridge between Southeast Asia and the world, Indonesia is a crucial business and tourism hub.

With substantial investments already underway, franchise growth in Indonesia is projected to accelerate significantly in the coming years.

InCorp is well-equipped to be your trusted franchise consultant in Indonesia.

Our Key Services:

  • Company Registration: Ensure a smooth and compliant company setup with expert guidance through Indonesia’s franchise regulations.
  • Business License: Obtain essential business permits efficiently to secure your franchise’s operational readiness in Indonesia.

Fill out the form below to start your profitable franchise journey with InCorp.

Daris Salam

COO Indonesia at InCorp Indonesia

With more than 10 years of expertise in accounting and finance, Daris Salam dedicates his knowledge to consistently improving the performance of InCorp Indonesia and maintaining clients and partnerships.

Get in touch with us.

Lead Form

Frequent Asked Questions

There are three things business owners need to consider before setting up a business in Indonesia: the type of business entity, capital requirements, and regulations.

Indonesian regulations separate local companies from foreign companies. Generally, foreign-owned companies (PT PMA) have more limitations than their local counterparts (Local PT). However, to pursue more foreign direct investment in the country, the government has taken several bold initiatives to increase the ease of doing business and provide numerous attractive incentives for foreign investors.

There are two main types, namely, primary business licenses and non-primary business licenses. The primary ones commonly apply to various industries, such as general and industrial business licenses. Additional non-primary ones are included, depending on the operations of your business. Examples of non-primary business licenses are operational and commercial licenses.

Yes, you must apply for it to be able to issue work permits for your foreign employees. This permanent business license is also a prerequisite for the applications for other business licenses and import licenses.