Buying a Franchise: Agree the Rules for Bringing in New Investors

Additional capital from investors can help franchise outlet owners expand. However, bringing in a new shareholder may require the franchisor’s approval, even if the outlet is not being sold and its management remains unchanged. Before buying, make sure the contract explains which ownership changes are permitted, the approval process and any potential fees. This clarity helps maintain good relationships between brand owners, franchisees and investors.

1. Distinguish between additional capital and a change of control

Do not assume that all incoming funds have the same legal consequences. A capital contribution through the issue of new shares differs from a shareholder loan. Buying a founder’s shares is also different from selling the outlet’s assets to another company.

If the franchisee is a limited liability company, a change in shareholders does not necessarily change the legal entity that signed the contract. However, the contract may still require approval because the change affects who controls the company.

Check how the contract defines a change of ownership and a change of control. Is approval triggered only by a change in the majority shareholder, or by any transfer of shares? Is an investor who gains the right to appoint directors or veto important decisions also considered to be taking control?

List the changes you might consider during the contract term:

• Bringing in a family member as a shareholder.
• Issuing new shares to fund additional outlets.
• Buying back the shares of a business partner who wants to leave.
• Bringing in a minority investor with approval rights over certain decisions.
• Changing the board of directors without changing the shareholders.

Ask the franchisor to explain how each scenario would be treated. These answers will help you assess whether your planned funding structure is compatible with the brand.

2. Check the contract against the legal framework

Indonesia specifically regulates franchising through Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. It governs franchise operations, including the franchise offering prospectus, franchise agreements and the Franchise Registration Certificate, known locally as the STPW.

Franchisors must provide prospective franchisees with an offering prospectus at least 14 calendar days before the agreement is signed. Use this review period to compare your ownership plans with the restrictions in the draft contract, rather than simply checking the package price.

Ownership and changes of ownership are provisions that warrant close attention in a franchise agreement. However, do not assume that franchise regulations automatically allow you to bring in investors without approval. Your specific rights must be assessed alongside the contract clauses and applicable law.

For franchisees established as an Indonesian limited liability company, or PT, changes in shareholding are also subject to Law No. 40 of 2007 on Limited Liability Companies, as amended, and the company’s articles of association. Franchisor approval does not replace corporate procedures; equally, a shareholders’ resolution does not automatically satisfy the obligations under the franchise agreement.

Ask a notary and a legal adviser to map out both sets of requirements. If the prospective investor is a foreign party, also check the relevant investment and licensing rules before promising an equity stake.

3. Negotiate a clearly defined approval process

A clause stating only that “changes of ownership require the franchisor’s approval” does not provide certainty about the process. You still need to know which documents are required, who will assess the application and when a decision will be issued.

Propose written provisions covering:

• Approval triggers: distinguish between changes of control, minority investments and administrative changes.
• Application documents: for example, investor identification, the ownership structure before and after the transaction, and the source of funding.
• Assessment criteria: financial capacity, conflicts of interest, involvement with competing brands or readiness to comply with management obligations.
• Response deadlines: specify when the review begins and how applicants will be notified of missing documents.
• Reasons for refusal: request a written decision so that any issues that can be resolved can be addressed.

Do not treat silence as approval unless this mechanism has been expressly agreed and legally reviewed. It is safer to establish a follow-up procedure for applications that remain undecided.

Also check whether a change in shareholding triggers administration fees, retraining or a requirement to sign a new contract. Ask for the basis of any charges and how they are calculated. Make sure the transaction does not inadvertently alter the contract term or previously agreed commercial terms.

4. Align the investor agreement before funds are transferred

The agreement with your investor should not promise rights that conflict with the franchise contract. For example, an investor might request the power to replace the outlet manager, while the franchisor requires designated managers to complete training and obtain approval.

Create a simple table setting out the investor’s rights, the restrictions in the franchise contract and the action required. Pay particular attention to rights to appoint directors, approve budgets, sell shares and decide on outlet expansion.

Make the necessary approvals a condition of completing the investment transaction. Also specify what happens to the funds if approval is refused or has not been obtained by the agreed deadline. Avoid accepting funds as a final capital contribution while the transaction structure remains unclear.

Practical step: before buying a franchise, draw up the current ownership structure and one scenario for bringing in an investor. Request written confirmation of the approvals required, the process, the costs and the implications for the contract. If the answers remain unclear, resolve these points before signing an investment commitment.