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Franchise businesses have become an integral part of Indonesia’s economic growth, providing opportunities for both local entrepreneurs and international companies to expand. In response to the growing significance of franchising and its complexities, the Indonesian government introduced Government Regulation No. 35 of 2024 on Franchises (“Regulation 35/2024”) to update the previous Regulation No. 42 of 2007 (“Regulation 42/2007”). The new regulation aims to provide clearer legal guidelines, promote fair business practices, and create opportunities for collaboration between franchisors and Micro, Small, and Medium Enterprises (“MSMEs”). This article outlines the key provisions of Regulation 35/2024 and its impact on the franchise industry in Indonesia.
Purpose and Rationale behind Regulation 35/2024
The rationale for enacting Regulation 35/2024 is to modernize the Indonesian franchise sector by aligning it with evolving business practices while ensuring legal certainty. This regulation aims to foster a fair business environment by addressing gaps in the previous law, further supporting the sector's growth.
The primary purpose of Regulation 35/2024 is to regulate franchise business activities in a way that ensures legal clarity for both franchisors and franchisees. The rationale behind this regulation includes several factors:
Definitions and Scope
The definitions and scope of franchising have broadened under Regulation 35/2024, capturing the modern trends in franchising, such as digitalization and cross-border transactions.
Franchise Criteria
To ensure that only legitimate and well-established businesses are franchised, Regulation 35/2024 stipulates clear criteria that franchisors must meet before offering franchise rights.
Franchise Offering Prospectus
The Franchise Offering Prospectus is a crucial document that franchisors must provide to prospective franchisees. It ensures transparency and informs the potential franchisee about the business model, financial performance, and intellectual property involved.
Franchise Agreement Provisions
The Franchise Agreement forms the legal foundation of the franchise relationship. It defines the rights and obligations of both the franchisor and franchisee, establishing the terms for the operation of the franchise.
Registration and Licensing
To operate legally, franchisors and franchisees must obtain a Franchise Registration Certificate (“STPW”). This certification process ensures that the business complies with Indonesian laws and is formally recognized as a franchise.
STPW Certification Process:
Use of Domestic Products
Regulation 35/2024 aims to promote the use of domestically produced goods and services in franchise businesses, supporting local industries and enhancing the involvement of MSMEs within the franchise ecosystem.
One key aspect of this regulation is the prioritization of domestic goods. Franchisors and franchisees are encouraged to prioritize Indonesian-produced goods and services, provided they meet the quality standards established by the franchisor. This approach ensures that local products are given precedence while maintaining high-quality standards.
In addition to prioritizing domestic products, the regulation mandates collaboration with local MSMEs. Franchisors and franchisees are required to partner with these enterprises to supply goods and services, fostering local economic growth and providing opportunities for smaller businesses to integrate into larger franchise operations.
Moreover, the regulation emphasizes the need for franchisors to create opportunities for MSMEs to become franchisees. If MSMEs meet the necessary eligibility criteria, franchisors must extend franchise opportunities to them, further supporting the development of small businesses in Indonesia.
Supervision and Sanctions
Under Regulation 42/2007, supervision was centralized under the Ministry of Trade, with penalties including fines and the revocation of registrations for violations. However, Regulation 35/2024 introduces decentralization, where both central and regional authorities now oversee operations. This new regulation also adopts a more structured penalty system, featuring graduated penalties that range from temporary suspensions to permanent revocations.
The key improvements under Regulation 35/2024 include decentralized oversight, allowing local authorities to play a greater role in franchise enforcement, which promotes compliance at a regional level. Additionally, the new regulation introduces a clearer penalty escalation process, which encourages compliance and ensures fairness in the administration of penalties.
Future Outlook
As the regulation promotes collaboration with MSMEs, a more inclusive and equitable franchise ecosystem is likely to emerge. This could lead to increased opportunities for local entrepreneurs and the use of domestically produced goods, thus boosting Indonesia’s economy.
Digitalization in franchising is another trend expected to accelerate under the new regulation. The broadened scope, which now includes modern franchise models like digital and cross-border transactions, may lead to a rapid expansion of e-commerce and online franchise platforms. As a result, the franchise sector could see stronger international participation, particularly from global brands aiming to leverage Indonesia’s growing digital economy.
Regulation No. 35 of 2024 represents a comprehensive update to Indonesia’s franchise landscape, aligning it with modern business practices while promoting fairness and inclusivity. The regulation not only addresses past gaps in franchise law but also creates a more conducive environment for growth, particularly by fostering collaborations with MSMEs. The emphasis on local products and decentralized enforcement further supports the vision of a robust, diversified, and regionally integrated franchise sector. Moving forward, the regulation is poised to drive the continued expansion of franchises in Indonesia, while balancing the interests of both large franchisors and smaller local businesses.
Should you have any inquiries related to this regulation or wish to ascertain its impact on your business or personal interests, please feel free to contact us.
