Buying a Franchise: Check the Contract Renewal Terms

Before buying a franchise, do not simply calculate how long the outlet can operate under the initial contract. Check what is required to renew the agreement as well. Long-term franchise relationships need certainty for both parties. Even a successful outlet may not be able to continue using the brand if its contract only offers an opportunity to apply for renewal, rather than a right to receive it.

Distinguish between a right to renew and a right to apply

Pay attention to the wording of the renewal clause. “The franchisee may apply for renewal” is different from “The franchisee is entitled to renewal if the requirements are met”. The first initiates an assessment process; the second establishes a clearer entitlement, although it still depends on meeting the requirements.

Indonesia specifically regulates franchising through Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. Franchise operations are based on an agreement between parties of equal legal standing. Renewal procedures are among the matters that must be covered in a franchise agreement.

However, the requirement to set out these procedures does not mean that every franchisee has an automatic right to renew. In practice, certainty still depends on what the contract says: who decides, what conditions apply and when a decision must be given.

Ask for written answers to these three questions:

• Is renewal a conditional right, or does it depend entirely on the franchisor’s approval?
• How long will the next contract term be, and is there a limit on renewal opportunities?
• Must reasons for refusal be provided in writing?

Do not rely on assurances that “good partners always get renewed”. Such a promise does not explain the eligibility criteria or the decision-making process.

Draw up a timetable for applications and decisions

Renewal risks often arise from missed deadlines. The contract may require you to apply well before it expires. Check whether a late application automatically rules out renewal or whether there is an opportunity to remedy the delay.

Create a timetable with separate dates for submitting the application, providing documents, outlet inspections, the renewal decision and signing the next agreement. Also note which methods of giving notice the contract recognises. A message to a sales representative may not count as a formal application.

The decision deadline is just as important as the application deadline. If the franchisor has no deadline for responding, you could face uncertainty when planning staffing, stock and expenditure for the next period.

Propose that the contract explain what happens if the assessment is still incomplete as the expiry date approaches. Do not assume that you can continue trading simply because your application is being processed. Any agreed temporary extension should be recorded in writing, including its duration, fees and rights to use the brand.

Also ask whether official reminders are available. Reminders help with administration, but they should not replace your responsibility to keep track of deadlines yourself.

Check eligibility criteria and opportunities to put things right

Requirements such as “satisfactory performance” or “compliance with all standards” are too broad unless they come with criteria that can be checked. Ask for a list of the criteria used, the assessment period and the evidence on which the assessment is based.

Criteria may relate to operational compliance, meeting payment obligations, completing training or handling customer complaints. Distinguish between requirements actually set out in the contract and internal practices that may change.

For each criterion, check four elements:

1. Measure: what counts as meeting or failing to meet the requirement?
2. Evidence: which reports or inspection findings are used?
3. Notice: when is the franchisee informed of any shortcomings?
4. Remedy: is there time to put things right, followed by a reassessment, before the final decision?

For example, operational issues that have been resolved should have their resolution documented. Without that record, old problems may resurface when renewal eligibility is assessed.

When speaking to franchisees who have renewed their contracts, ask whether the actual process matched the documentation. Their experience can help you check consistency, but it does not guarantee the same outcome for your application.

Calculate the costs and check changes to the next contract’s terms

Renewal does not necessarily mean continuing the old contract with new dates. You may be required to sign the franchisor’s current form of agreement. Check whether the existing clause allows unrestricted changes or sets out a process for notification and review.

Ask for a breakdown of renewal fees, assessment fees and any other expenditure required as a condition of renewal. If amounts cannot yet be specified, propose a clear formula or cap on increases. This is a matter for negotiation, not an automatic right guaranteed by regulation.

Ask when you will receive the draft renewal agreement and fee details. Avoid a situation in which the acceptance deadline arrives before you have had a chance to review the changes with a legal adviser and an accountant.

When assessing the initial purchase, separate projected business returns during the confirmed contract term from potential returns after renewal. Do not treat an additional term as certain if approval is not guaranteed.

Practical step: before signing, prepare a one-page summary of renewal rights, deadlines, criteria, costs and limits on changes to the terms. If any of these still depend on a verbal promise, obtain written clarification first.