Tuesday, May 28, 2024

How-to understand franchise regulation in Indonesia

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Franchising has become one of the most prominent business models in recent years, particularly in sectors such as food and beverage (F&B), education, fashion and modern lifestyle. The franchise business model is becoming an increasingly popular method of entering the Indonesian market for both local and foreign investors. Foreign retail brands and service providers, who have seen weak demand in their traditional home markets, are keen to capitalize on the growing power of Indonesian consumers.

Governing laws and regulation 

  • Law No. 7/2014 on Trade as amended by Law No. 11/2020 concerning Job Creation
  • Government Regulation (PP) No. 42/2007 regarding Franchises
  • Minister of Trade Regulation (Permendag) No. 71/2019 concerning the Implementation of Franchising

General rules

Franchise is a special right owned by an individual or a business entity to a business system with business characteristics in the context of marketing goods or services that have been proven successful and can be utilized or utilized by other parties based on a Franchise Agreement. In the franchise business, there are franchisors, franchisees, continued franchisors and continued franchisees. Franchisor is an individual or business entity that grants the right to utilize or use its Franchise to the Franchisee. Franchisee is an individual or business entity that is granted the right by the Franchisor to utilize or use the Franchise owned by the Franchisor. Continuing Franchisor is a Franchisee who is given the right by the Franchisor to appoint a Continuing Franchisor. Continuing Franchisee is an individual or business entity that receives rights from the Continuing Franchisor to utilize and/or use the Franchise.

The franchise must meet the following criteria:

  • Have Business Characteristics. Business Characteristics is a business that has advantages or differences that are not easily imitated compared to other similar businesses, and makes consumers always look for the characteristics in question, for example management systems, sales and service methods or arrangements, or distribution methods which are special characteristics of the franchise provider.
  • Proven to have provided benefits. This criterion is met in the event that the Franchisor has at least 5 (five) years of experience and has had business tips to overcome business problems, which in this case is proven by the survival and development of the Franchisor’s business profitably.
  • Have standards for services and goods and/or services offered which are made in writing. Easy to teach and apply. This criterion is met in the event that the Franchisor who does not have experience or knowledge of similar businesses can still carry out properly in accordance with the operational and management guidance provided by the Franchisor.
  • There is ongoing support. This criterion is a continuous support from the Franchisor to the Franchisee which is provided, among others, in the form of operational guidance, training, and promotion. 
  • Registered Intellectual Property Rights (IPR). These criteria include IPR related to businesses such as trademarks, copyrights, patents, licenses, or trade secrets that have been registered and have certificates or are in the process of being registered at the competent authority.

Franchise Operators consist of:

  • Franchisor comes from abroad;
  • Franchisor comes from within the country;
  • Continuing Franchisors come from foreign Franchisors;
  • Continuing Franchisors come from domestic Franchisors;
  • Franchisees are from foreign franchisees;
  • The Franchisee comes from a domestic Franchise;
  • Continuing Franchisees are from overseas Franchisors; and
  • Continuing Franchisees come from domestic Franchisors.

Liability of the Franchisor

The Franchisor must provide a Franchise offer prospectus to the prospective Franchisee at the time of making the offer. The Franchise offer prospectus shall at least contain the following:

  • the identity data of the Franchisor;
  • business legality of the Franchisor;
  • history of business activities;
  • the organizational structure of the Franchisor;
  • financial statements for the last 2 (two) years;
  • number of places of business;
  • list of franchisees; and
  • rights and obligations of the Franchisor and Franchisor.

The Franchisor must provide guidance in the form of training, operational management guidance, marketing, research and development to the Franchisor on an ongoing basis. Franchisor and Franchisee prioritize the use of domestically produced goods or services as long as they meet the quality standards of goods or services stipulated in writing by the Franchisor. The Franchisor must cooperate with small and medium-sized entrepreneurs in the local area as Franchisees or suppliers of goods and/or services as long as they meet the requirements set by the Franchisor.

License

Before signing a franchise agreement with the franchisee, the franchisor must provide a franchise offering prospectus to the franchisee at least 14 days before entering into the franchise agreement. A franchise offering prospectus must at least contain the following: 

  • the identity of the franchisor; 
  • the franchisor’s business license, as registered in the country of origin; 
  • brief history of the franchisor’s business activities; 
  • the organizational structure of the franchisor; 
  • audited financial statements for the past two years; 
  • a list of franchisees; 
  • a brief description of the rights and obligations of the franchisor and franchisee as stated in the franchise agreement; and 
  • information regarding intellectual property rights related to the franchised business. 

The franchise offering prospectus must be officially translated into Indonesian language, and be formally registered through the online single submission system (OSS) before the franchisor signs a franchise agreement with the franchisee. Although there is no explicit clause in the franchise regulations regulating the veracity of information included in the franchise offering prospectus, the Indonesian Civil Code stipulates that an agreement has no legal force and can be annulled if it is entered into due to fraud, which in Indonesian law can be broadly interpreted to include misrepresentation. Franchise Offering Prospectus registered by a foreign Franchisor must be legalized by a Public Notary by attaching a certificate from the Trade Attaché of the Republic of Indonesia or the Representative Office of the Republic of Indonesia in the country of origin.

In addition to the prospectus registration and franchise agreement, STPW (Franchise Registration Certificate) must also be submitted and obtained by all parties through the Online Single Submission (OSS) system. Under Indonesian franchise regulations, both the franchisor and the franchisee must register for an STPW . The franchisor must register the prospectus, while the franchisee must register the franchise agreement. Registration must be done through the OSS, and after all the requirements are met, the STPW will be issued by the Ministry of Trade. The franchisor or sub-franchisor will not be able to obtain STPW from the trade ministry. If they do not obtain an STPW, the franchisor or sub-franchisor may be subject to administrative sanctions in the form of a warning letter and a maximum fine of IDR 100,000,000.

It is an existing requirement that the franchisor and franchisee must have an STPW issued by the trade ministry. Obtaining an STPW can be difficult and, under previous regulations, was only valid for 5 years. Based on the Permendag No. 71/2019, there is no longer a limit on the validity period of the STPW. Once the STPW is obtained, the STPW will remain in effect indefinitely, unless the validity period of the underlying franchise agreement has expired (for franchisees) or one of the parties stops conducting business activities or the registration of the IPR by the franchisor is not approved by the Directorate General of IPR or the validity period of IPR under the franchise has expired. 

The Permendag No. 71/2019 requires that franchising has proven to be a profitable business, according to the franchisor’s experience of at least 5 years. This means that the franchisor (or primary franchisor) must wait at least 5 years to be able to offer a franchise (or sub franchise) of his business to another party. Assuming this provision is implemented as is, it is likely to cause problems for both local and international franchisors.

Previously, franchisors or franchisees in the F&B sector were only allowed to establish up to 250 self-owned outlets. Those who are engaged in the modern shop business are allowed to operate up to 150 company-owned units. Since the Permendag No. 71/2019 revoked the related regulation, the self-owned outlet restriction no longer applies.

Obligation to use domestic products

The Franchisor prioritizes the use of domestically produced goods or services as long as they meet the quality standards of the goods or services stipulated in writing by the Franchisor. The Franchisor must cooperate with small and medium-sized entrepreneurs in the local area as Franchisees or suppliers of goods or services as long as they meet the requirements set by the Franchisor. Prioritizing the use of domestically produced goods or services is carried out based on the provisions of laws and regulations. In running a franchise, the franchisor prioritizes the processing of domestic raw materials.

Report obligation

Domestic Franchisor, Foreign Continuing Franchisor, Domestic Continuing Franchisor and Foreign Franchisee, who have STPW, are required to submit a report on their franchise business activities to the Director of Business Actor Development and Distribution. And those originating from within the country are obligated to submit a Franchise business activity report to the head of the agency responsible for trading in the Jakarta Province or local city/regency. If the Franchise business activity is no longer carried out, it must also be submitted in writing to the OSS Institution through the Director of Business Development and Distribution Actors. The deadline for submitting the annual report is extended by 3 months until the end of June each year. In addition, pursuant to the Permendag No. 71/2019, the trade ministry may conduct site inspections at the franchised business premises, and may question the information provided in the annual report, particularly with regard to the use of local products. The sanction for not submitting the annual report remains the same (starting from a written warning to revocation of business license, applied in stages). 

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