Defining the Scope of Business Activities in a Franchise Agreement

When owners begin franchising their business, they often assume franchisees will operate exactly as they do in their own outlets. Yet franchisees may want to add services, accept special orders or sell other products on the same premises. Before recruiting franchisees, clearly define the scope of permitted business activities. Within a franchise network, this clarity helps protect the business’s identity while giving franchisees a scope of operation they can understand from the outset.

1. Distinguish business activities from the right to use the brand

The right to use a brand does not, on its own, answer every question about what a franchisee may do. A drinks outlet, for example, may be allowed to sell drinks and accompanying snacks, but not necessarily to run paid classes under the same brand name.

Indonesia specifically regulates franchising through Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. The regulation requires franchise agreements to cover certain matters as a minimum, including business activities, the business system, intellectual property that remains under protection, and the parties’ rights and obligations.

Simply naming the brand and including a general phrase such as “operating the business in accordance with the franchisor’s concept” may therefore offer insufficient guidance for day-to-day operations. The scope of business activities needs to be expressed in terms that outlet managers can readily understand.

Separate three elements in the draft agreement:

• Business activities: which goods or services may be offered to customers.
• Brand use: which activities may use the brand’s name, symbols and identity.
• Business system: how those permitted activities must be carried out.

These elements are interconnected, but should not be combined into a single vague provision. Nor does the franchisor’s approval replace any business licences that additional activities may require.

2. Build a list of activities based on your own outlets’ practices

Start with what your business actually does, rather than a sample contract from another brand. Record what customers buy, how services are delivered and who is responsible for the outcome. Include any ancillary services that have so far been handled directly by the owner.

Group activities into the following three categories.

Permitted from the outset. These are the core activities included in the franchise offering. For a laundry business, for example, they might include washing and ironing clothes within the agreed service categories.

Subject to prior written approval. This category covers activities related to the core business that require additional capacity, expertise or responsibility. One example is handling large volumes of laundry under contracts with business customers.

Not included in the franchise rights. Examples include running paid training under the brand name or selling brand-use rights to third parties. Do not rely on verbal prohibitions for activities that franchisees might regard as business opportunities.

Test the list with a simple question: can an outlet manager identify the relevant category without phoning the founder? If not, add more specific examples and limits. Avoid terms such as “similar services” without explanation, as they can easily be interpreted too broadly.

3. Set rules for other businesses on the premises and requests for exceptions

A single location can accommodate more than one business activity. A franchisee may want to place a display of their own products near the till or use a back room to take on work outside the franchise’s services. The issue is not just competition: customers may also assume that the brand stands behind all activities on the premises.

Decide from the outset whether other businesses may operate alongside the franchise. If so, explain what must be kept separate, such as service areas, the seller’s identity on receipts, equipment use and staff assignments. These provisions are operational and contractual choices, not a set of specific obligations automatically imposed by Government Regulation No. 35 of 2024.

For requests to undertake additional activities, use a short form asking for:

• a description of the goods or services to be offered;
• target customer groups and the expected workload;
• proposed use of space, equipment, staff and the brand;
• any licences required and who will obtain them;
• risks to the core service and how they will be managed.

Specify who has authority to decide and how decisions must be recorded. Do not allow approval given in a private conversation to be treated as a permanent extension of franchise rights. If permission is limited to a particular activity or period, record those limits and the review process. Activities that change the scope of rights under the agreement should be documented through an appropriate amendment.

4. Explain the limits before prospective franchisees make their decision

The scope of permitted business activities affects how prospective franchisees assess potential revenue. Explain it during discussions about the franchise offering, rather than after they have prepared premises and recruited staff.

Government Regulation No. 35 of 2024 requires franchisors to provide a franchise offering prospectus to prospective franchisees at least 14 calendar days before the agreement is signed. Use this review period to discuss both core activities and any additional activities the prospective franchisee plans to undertake, rather than treating it merely as a document-delivery formality.

Make sure the recruitment team’s explanations do not suggest that all additional activities are automatically permitted. Discuss concrete examples, then record important questions and decisions. Ask a legal reviewer to check that the scope of permitted activities is consistent with the provisions on brand use, rights and obligations, and the business system.

Practical step: before offering a franchise, prepare a one-page list of activities that are permitted, require approval or fall outside the franchisee’s rights. Use it to align the franchise offering, agreement and outlet manager briefings.