When Can an F&B Business Start Franchising? Minimum Operational Age and Legal Risks

Introduction

The food and beverage (F&B) industry is one of the business sectors that frequently expands its networks through a franchise system. In the franchise context, a common question is whether a business may begin franchising immediately upon commencing operations or must first satisfy certain requirements. To provide legal certainty and establish standards for franchise organizers, the government has set forth several criteria that must be met before a business can offer a franchise. Through Government Regulation Number 35 of 2024 on Franchising, the government establishes requirements regarding a business's operational period, financial condition, and other mandatory criteria before it may engage in franchising.

Legal Basis

Government Regulation Number 35 of 2024 on Franchising ("GR 35/2024") governs the criteria and procedures for conducting franchise activities in Indonesia. GR 35/2024 sets forth several criteria that must be fulfilled by Franchisors and Sub-Franchisors before conducting franchise activities. The provisions regarding these criteria are stipulated in Article 4 of GR 35/2024 as follows:

Article 4 Paragraphs (1) and (2) of GR 35/2024

"(1) Franchisors and Sub-Franchisors, in conducting Franchise activities, must fulfill the Franchise criteria.

(2) The Franchise criteria as referred to in paragraph (1) include:

a. possessing a business system;

b. the business has already proven profitable;

c. possessing registered or recorded intellectual property; and

d. continuous support from the Franchisor and/or Sub-Franchisor to the Franchisee and/or Sub-Franchisee."

This provision stipulates that Franchisors and Sub-Franchisors must meet several criteria before engaging in franchise activities. One such criterion is that the franchised business must already be profitable, as referred to in letter b. The criteria for a profitable business are further stipulated in Article 4 paragraph (5) of GR 35/2024.

Article 4 Paragraph (5) of GR 35/2024

"(5) The criterion of the business already proving profitable as referred to in paragraph (2) letter b is evidenced by:

a. the franchised business activities having been operational for at least 3 (three) consecutive years; and

b. the financial statements for the last 2 (two) years showing a profit and having been audited by a public accountant with an unqualified opinion."

To meet the profitability criterion, the business to be franchised must have been operational for at least 3 (three) consecutive years. Furthermore, the Franchisor must possess financial statements for the last 2 (two) years demonstrating profitability, which have been audited by a public accountant with an unqualified opinion.

Article 4 Paragraph (6) of GR 35/2024

"(6) The provision for financial statements audited by a public accountant as referred to in paragraph (5) letter b is exempted for Franchisors or Sub-Franchisors in the Micro and Small Enterprise scale."

For Franchisors or Sub-Franchisors operating at the Micro and Small Enterprise scale, the obligation to submit financial statements audited by a public accountant is exempted. However, they must still maintain financial statements indicating profitability as required under Article 4 paragraph (5) letter b of GR 35/2024.

Risks of Sanctions for Violators

GR 35/2024 regulates administrative sanctions for parties violating the provisions on organizing franchises. A key prohibition set forth in Article 37 of GR 35/2024 is the use of the term and/or designation "Franchise" without possessing a Franchise Registration Certificate (Surat Tanda Pendaftaran Waralaba, "STPW"). Violations of this provision may be subject to administrative sanctions as stipulated in Article 39 paragraph (1) of GR 35/2024, in accordance with the provisions of laws and regulations in the risk-based Business Licensing sector.

Strategic Steps to be Taken

To ensure compliance with the franchise requirements under GR 35/2024, Franchisors and Franchisees may consider the following steps:

1. Verifying the operational period: The Franchisor must ensure that the business to be franchised has been operational for at least 3 (three) consecutive years, as required under Article 4 paragraph (5) letter a of GR 35/2024.

2. Preparing financial statements: The Franchisor must systematically prepare and document financial statements to fulfill the requirements set forth in Article 4 paragraph (5) letter b of GR 35/2024.

3. Verifying STPW ownership: Pursuant to Article 13 paragraph (1) of GR 35/2024, the Franchisor or Sub-Franchisor is required to possess an STPW prior to executing the Franchise Agreement. Therefore, prospective Franchisees may request and verify the STPW before signing the agreement.

4. Reviewing the Franchise Offering Prospectus: Under Article 5 paragraph (1) of GR 35/2024, the Franchisor or Sub-Franchisor must submit the Franchise Offering Prospectus to the prospective Franchisee or Sub-Franchisee no later than 14 (fourteen) calendar days prior to the signing of the Franchise Agreement. Prospective Franchisees can utilize this period to review the information provided in the prospectus.
   

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Recommendations

To mitigate legal risks and support business readiness prior to organizing a franchise, the following recommendations may be considered:

1. Utilize alternative business arrangements before fulfilling the requirements: If the business does not yet meet the requirements under GR 35/2024, businesses should consider other forms of cooperation, such as trademark licensing or other partnership models. Additionally, the use of the term and/or designation "Franchise" must comply with Article 37 of GR 35/2024 concerning STPW ownership.

2. Prepare the business system early on: Businesses should utilize the operational period to develop Standard Operating Procedures (SOP), business process documentation, and business systems to be applied to partners. This step facilitates compliance with the criterion of possessing a business system as referred to in Article 4 paragraph (2) letter a of GR 35/2024.

3. Review franchise documents before signing the agreement: Prospective Franchisees should examine the STPW, the Franchise Offering Prospectus, and other information provided by the Franchisor before making an investment decision.
   

Closing

GR 35/2024 stipulates that a business to be franchised must have been operational for at least 3 (three) consecutive years and possess financial statements for the last 2 (two) years showing profitability, audited by a public accountant with an unqualified opinion, as set forth in Article 4 paragraph (5). For Franchisors or Sub-Franchisors at the Micro and Small Enterprise scale, the obligation for audited financial statements is exempted under Article 4 paragraph (6). Furthermore, GR 35/2024 prohibits the use of the term and/or designation "Franchise" without possessing an STPW, and violations of this provision are subject to administrative sanctions as stipulated in Article 39 paragraph (1). Therefore, businesses must ensure that the franchise requirements are fulfilled before commencing franchising activities, particularly regarding the operational period, financial statements, and STPW ownership. Conversely, prospective Franchisees must verify the STPW and Franchise Offering Prospectus prior to executing the Franchise Agreement. Should the requirements for organizing a franchise not yet be met, businesses may consider alternative cooperation models, such as trademark licensing or other partnerships, while developing the business systems to be implemented when the franchise is eventually launched.