“With franchise system, the business actor could enter into an agreement with the original business owner to establish a business which uses the same system, products, and even intellectual property as the original business as if they are a branch of the same business.”
According to Government Regulation Number 42 of 2007 on Franchise (“PP 42/2007”), franchise is a special right owned by an individual or business entity over a unique business system in order to market goods and/or services which has been proven successful and could be used by other party based on franchise agreement. In other words, with franchise system, someone could enter into an agreement with the original business owner to establish a business which uses the same system, products, and even intellectual property as the original business as if they are a branch of the same business.
Characteristic of Franchise
Following the Minister of Trade Regulation Number 71 of 2019 on Franchise Organization (“Permendag 71/2019”), a business is eligible as franchise if it fulfills the following criteria:
- It has specific business characteristic;
- It has proven to profitable;
- It has a written standard of the services and/or goods offered;
- Could be taught to and applied by others easily;
- There is a sustainable support;
- It has registered Intellectual Property.
Further, this regulation explains that a franchisor must have at least 5 (five) years of experience and sufficient business strategies to solve potential business problems, which is proven by the development of the business in a profitable way. Such business must also be able to be taught by the franchisor to other party (franchisee) which has no experience of knowledge of the relevant business, to the point the franchisee could run the business well. Continuous support must also be given from the franchisor to the franchisee in the form operational guidance, training, and promotion. Lastly, the intellectual property of the franchise must be registered to the relevant institution, it is sufficient even if the registration is still on process. Only if all these criteria are fulfilled that a franchise could be approved.
A franchisor could be from local business or overseas business, however it must be noted that even if the franchisor is from overseas, a franchise must be prioritize local products and manpower. A franchisor cannot enter into franchise agreement with some other big foreign companies, instead the franchisor must be local small or medium business. The same also applies for the supplier of the product, as the franchise must prioritize using locally produced goods.
Franchise Agreement
A franchise cannot be made based on just verbal agreement between the franchisor and franchisee. According to PP 42/2007, a franchise agreement must be made in written with Indonesian language (or translated into Indonesian language). Such an agreement must at least include the following clauses:
- Name and address of the parties, this include not only the franchisor and franchisee, but any subsequent franchisor and franchisee;
- Type of intellectual property used in the franchise, such as brand, logo, design, management system, marketing system, recipe, etc;
- Scope of business;
- Right and obligations of the parties, including any subsequent franchisor and franchisee which in general should include the right of franchisor to receiver fee/royalty while providing support to franchisee, and the right of franchisee to use the franchise while keeping the confidentiality of intellectual property or any relevant business information of the franchise;
- Support, facilities, operational guidance, training and marketing given from the franchisor to the franchisee;
- Scope of the market;
- Term of agreement;
- Reward payment method, including the fee or royalty;
- Ownership, change of ownership, and right of heir which is necessary in the event there is a change of ownership or the owner passed away during the term of the agreement;
- Dispute settlement;
- Method of renewal and termination of the agreement; and
- Amount/list of booth which shall be managed by the franchisee or subsequent franchisee during the term of the agreement.
Before both parties enter into franchise agreement, the franchisor must first provide a prospectus of the franchise. Both the prospectus and the franchise agreement must be registered to the Ministry of Trade. The Ministry of Trade will then issue Franchise Registration Letter which will be valid for 5 (five) years.
Author: Benedictus Giovanni
Gaffar & Co., Indonesian Boutique Law Firm which specializing and focus on commercial law areas e.g. Investment Regulatory and Corporate Secretarial.
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