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Franchise Regulation Update: What Business Owners Need to Know in the Era of GR 35/2024

Franchise Regulation

Government Regulation Number 35 of 2024 on Franchising (“GR 35/2024”) replaces Government Regulation No. 42 of 2007 on Franchising (“GR 42/2007”), and aims to clarify franchising regulations in Indonesia. GR 35/2024 introduces new criteria requiring franchises to implement Standard Operating Procedures (“SOP”), and reiterates the obligation to submit audited financial statements from the last two years to demonstrate profitability—a requirement previously outlined in the Minister of Trade Regulation Number 71 of 2019 on Franchise Management (“MOTR 71/2019”). GR 35/2024 also establishes stricter sanctions and prohibits using a “franchise” term without a valid registration. By reaffirming more detailed Intellectual Property (“IP”) protections, GR 35/2024 supports franchise owners in safeguarding their innovations and creating broader collaboration opportunities for Micro, Small, and Medium Enterprises (“MSMEs”).


 

Franchising has become one of the fastest-growing business models in Indonesia, significantly contributing to economic growth and job creation. The Indonesian government has issued GR 35/2024 to accommodate this dynamic business landscape, replacing GR 42/2007. This new regulation aims to provide clearer and more comprehensive provisions for franchisor, particularly amid rapid changes in the business world.

Franchise Regulation

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GR 35/2024: Franchise Regulation Update

GR 35/2024 replaces GR 42/2007 by providing more stringent and detailed provisions regarding franchising in Indonesia. While GR 42/2007 is deemed no longer relevant, the implementing regulation of GR 42/2007, which is MOTR 71/2019, remains the implementing regulation. In this context, GR 35/2024 not only retains many provisions from MOTR 71/2019 but also introduces several new provisions that are essential for franchise owners to consider.

While many of the provisions in GR 35/2024 are reiterations or clarifications of existing rules under MOTR 71/2019, there are several important updates, most notably the introduction of new SOP requirements. Meanwhile, other provisions, such as those pertaining to audited financial statements and sanctions, are restatements that build on the existing framework provided by MOTR 71/2019.

The following table outlines clear distinctions between the new elements and the key reaffirmed points in GR 35/2024, along with their implications for franchisor:

Aspect GR 35/2024 Explanation
Business System Criteria Must have an SOP This is a new provision ensuring franchises establish clear, structured guidelines.
Financial Reporting Requires audited financial statements for two consecutive years. This restates the existing requirement, reinforcing transparency in demonstrating profitability.
Sanctions Provides two written warnings within 14 working days before imposing severe sanctions. A restatement, now structured to allow offenders a chance to correct issues before more severe penalties are imposed.
OSS System for Sanctions Implements a risk-based Online Single Submission system with automatic notifications for certain provisions. A new feature, but limited to specific areas such as sanctions related to Rights and Obligations, Franchise Registration Certificate or Surat Tanda Pendaftaran Waralaba (“STPW”), Logo Use, and Reporting Obligations.
Prohibition on the Use of the Term “Franchise” Prohibits the use of the term “franchise” without a valid STPW. This new provision protects the integrity of legitimate franchise businesses, prevents fraudulent practices, and provides assurance to consumers and involved business operators.
IP Regulates that intellectual property includes trademarks, copyrights, patents, trade secrets, industrial designs, and integrated circuit layouts. Restates and expands the scope of protection for business identities and innovations, offering comprehensive coverage.
Collaboration with MSMEs Opens broader opportunities for MSMEs to collaborate with larger franchises. Restates and expands the scope of protection for business identities and innovations, offering comprehensive coverage.

 

*Note: The only truly new criterion introduced by GR 35/2024 is the mandatory SOP requirement. The other provisions, while reaffirmed and detailed, represent restatements of what has been stipulated under MOTR 71/2019.

Franchise Regulation

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New Criteria in Franchise Business: Business Systems

One of the main changes in GR 35/2024 is the introduction of provisions regarding business systems as a key criterion that franchisor must meet.1 Every franchisor is required to have a written SOP that covers:2

  1. Human resource management;
  2. Administration;
  3. Operational management;
  4. Standard operating methods;
  5. Business location selection;
  6. Store design;
  7. Employee requirements; and
  8. Marketing strategies.

This SOP should be easy to teach and implement and requires clear cooperation between the franchisor and franchisee.3

Effective implementation of SOP is crucial to ensure that each franchise has a measurable and consistent operational framework. With a detailed SOP, franchisors can enhance operational efficiency. Every business aspect regulated by clear procedures facilitates coordination between the franchisor and franchisee, thereby reducing the risk of errors in execution.

Additionally, a structured system helps maintain consistent product and service quality. This is important for preserving brand reputation and ensuring that each franchisee can operate the business according to established standards. Lastly, a clear framework between the franchisor and franchisee minimizes the potential for future conflicts.

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Requirement for Audited Financial Statements

Another important point in GR 35/2024 is the obligation to demonstrate profitability for three consecutive years, which must be substantiated by the last two years’ audited financial statements from a public accountant with an unqualified opinion.4 This provision streamlines the previous requirement under MOTR 71/2019, which mandated that franchisors demonstrate at least five years of operational success and growing profitability. However, MOTR 71/2019 lacked clarity within its main provisions on how this profitability should be demonstrated. In fact, the details were only outlined in its annex, which specified that profitability should be demonstrated using audited financial statements for the last two years—essentially the same method now explicitly required in GR 35/2024. This clarification offers greater transparency for both franchisors and franchisees. Consequently, GR 35/2024 provides more explicit legal certainty and underscores the importance of financial transparency as part of the main criteria for franchising.

In this regard, we believe that the requirement for audited financial statements can enhance the accountability of franchisors. Through public audits, they must adhere to stricter financial standards, meaning they must not only ensure that their businesses are profitable but also transparent in their financial reporting. This is crucial to minimize the risk of disputes that may arise in the future.

Moreover, GR 35/2024 reaffirms existing MSME exemptions from audited financial statements, as already outlined in MOTR 71/2019’s appendices, making it a restatement rather than a new provision.5

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Sanctions and Prohibitions

The primary difference between GR 35/2024 and MOTR 71/2019 lies in the specificity of the sanctions. In GR 35/2024, sanctions for each violation are explained in each relevant chapter, making it easier for business operators to understand the consequences of violating each provision. In GR 35/2024, the provisions regarding administrative sanctions are also more structured, with two written warnings required within a 14-working-day period. While MOTR 71/2019 stipulates a 14-day response period, GR 35/2024 refines this by specifying 14 working days, providing a more precise and structured period for compliance.

If violations persist after this warning, the relevant authority—be it the Minister, Governor, Regent/Mayor, or Head of the Capital City Authority—can impose sanctions such as temporarily suspending franchise operations or even revoking the STPW if non-compliance continues.

The prohibition provisions in PP 35/2024 also introduce something new: the prohibition of the use of the term “franchise” by individuals or business entities without a valid STPW.6 This is critical for protecting the integrity of legitimate franchise businesses and preventing fraudulent practices.

How GR 35/2024 Regulates Intellectual Property

While there are no significant changes related to IP in GR 35/2024, there is a more detailed affirmation of the obligation to register IP related to franchising operations. This includes trademarks, copyrights, patents, trade secrets, industrial designs, and integrated circuit layouts. 7

From our perspective, the more specific affirmation in GR 35/2024 allows franchise owners to more easily protect their innovations and business systems from imitation or infringement by others. The addition of types of IP that must be registered provides broader protection for franchise owners. Now, not only are trademarks and copyrights recognized and protected, but so are industrial designs and integrated circuit layouts, ensuring that every innovative aspect of product design and technology used in franchise operations can be secured through a more detailed IP system outlined in this regulation.

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Conclusion

GR 35/2024 introduces several significant updates to the franchise business system, particularly concerning the business system, audited financial reporting, sanctions and prohibitions, and IP protection. While it does not bring drastic changes, this regulation provides a clearer legal framework for franchisors.

Franchise owners must promptly adapt to these new provisions and stay updated on regulatory developments to ensure compliance and smooth business operations.

For further information on franchise regulations in Indonesia, please feel free to contact us at ADCO Law.

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About ADCO Law:

ADCO Law is a law firm that offers clients a wide range of integrated legal services, including commercial transactions and corporate disputes in a variety of industry sectors. Over the course of more than a decade, we have grown to understand our clients’ industries and businesses as well as the regulatory aspects. In dealing with business dynamics, we provide comprehensive, solid legal advice and solutions to minimize legal and business risks.

From Upstream to Downstream, We Understand Your Industry. In complex transactions and certain cases, we actively engage with financial, tax, and environmental specialists, accountants, and law firms from various jurisdictions to add value to our clients. Our strong relationships with Government agencies, regulators, associations, and industry stakeholders ensure that our firm has a holistic view of legal matters.

ADCO Law is a Proud Member of the Alliott Global Alliance (AGA) in Indonesia. Founded in 1979, AGA is one of the largest and fastest-growing global multidisciplinary alliances, with 215 member firms in 95 countries. As a law firm, we also believe in regeneration. To stay abreast of business changes and stay relevant, our formation of lawyers is comprised of the top graduates from Indonesian and international law schools.

 

Contact our Business Development team for further information:

Alvin Mediadi, Business Development Manager, Indonesia 

[email protected]