Defining Sub-Franchising Rights in a Franchise Agreement

When you begin franchising your business, prospective partners may ask for the right to recruit other franchisees. This is different from permission to open several outlets themselves: it introduces new parties who will depend on your business system, brand and support. Sub-franchising rights need to be clearly defined so that network growth does not outpace your capacity to provide support.

Distinguish outlet operation from sub-franchising

A partner who operates several outlets does not automatically acquire the right to offer franchises to others. Likewise, the right to operate within a particular territory should not be interpreted as permission to recruit sub-franchisees.

Before drafting the clauses, decide which development model you actually want:

• Direct operation: the partner opens and manages their own outlets under the agreement.
• Prospective partner introductions: the partner simply introduces prospective franchisees, while the original franchisor remains responsible for assessment and contracting.
• Sub-franchising: the partner receives expressly defined rights to act as a sub-franchisor to other parties.

Do not use terms such as “lead partner” or “regional operator” without explaining the authority they carry. A commercial title does not establish who may offer the business opportunity, sign agreements, receive payments or provide support.

If the business is not ready for sub-franchising, state explicitly that these rights are not granted. The prohibition should cover offering or promising franchise rights to third parties, not just signing agreements with them.

Understand the role of a sub-franchisor

Indonesia’s Government Regulation No. 35 of 2024 on Franchising recognises sub-franchisors and sub-franchisees. It provides that franchising activities must be based on an agreement between a franchisor and a franchisee, or between a sub-franchisor and a sub-franchisee, with the parties having equal legal standing and Indonesian law applying.

This means sub-franchising is more than a channel for finding prospective partners. Anyone undertaking it needs to understand their obligations as a sub-franchisor, including meeting the franchise criteria and providing franchise offering information.

Under the regulation, a sub-franchisor must hold a Franchise Registration Certificate, known locally as an STPW (Surat Tanda Pendaftaran Waralaba), before entering into a franchise agreement. The application must include evidence of the franchise offering prospectus. The prospectus must also be provided to the prospective sub-franchisee at least 14 calendar days before the agreement is signed.

Do not assume that the original franchisor’s STPW fulfils the registration obligations of the party acting as sub-franchisor. Nor should you simply use the original franchisor’s prospectus without checking that it accurately reflects the identity, legal status, business system and circumstances of the party offering the sub-franchise.

These requirements are legal obligations. By contrast, the limits on authority, approval processes and allocation of responsibilities discussed below need to be designed around the business model and reviewed by a legal adviser.

Define the limits of the rights and allocate responsibilities

Start with a simple question: what may the partner do in their own name, and what still requires the original franchisor’s approval? The answer needs to be set out in the agreement, not just in a sales presentation.

Draw up an authority matrix covering four areas:

1. Offering franchises and accepting prospective partners. Specify who assesses prospective sub-franchisees, approves offers and ensures that the information provided is not misleading.
2. Use of intellectual property. Ensure that the rights granted allow sub-franchisees to use the brand within the agreed limits. Do not promise rights you do not control.
3. Training and ongoing support. Explain who trains the team, helps with preparations for opening, responds to operational issues and bears the cost of this work.
4. Monitoring and follow-up. Specify who checks outlet compliance and who must address any breaches or departures from standards.

Avoid allocating responsibilities with phrases such as “to be discussed later”. Sub-franchisees need to know whom to approach for help, while the original franchisor needs to know whether business standards are actually being maintained.

Review payment flows as well. If the sub-franchisor receives fees from sub-franchisees, ensure that their support obligations are aligned with that income. Do not create a model that offers strong incentives to recruit but fails to provide resources for support once outlets have opened.

Assess readiness before activating the rights

Sub-franchising rights should not be granted simply because a prospective partner promises rapid growth. Assess whether the prospective sub-franchisor has the team, training capability, administrative systems and financial capacity to support other parties.

As an internal control, you can introduce staged approvals before sub-franchises may be offered. For example, check that those responsible for support are ready, that offering documents are complete, that registration obligations have been met and that a process is in place for handling outlet problems. Make clear that this internal review does not replace legal requirements.

Work through practical scenarios too: if a sub-franchisee encounters an operational problem, who responds? If the relationship with the sub-franchisor ends, how will support for sub-franchisees be handled? Do not promise an automatic takeover of responsibilities without first confirming the contractual basis and your capacity to deliver it.

Practical step: before approving sub-franchising, prepare a single matrix setting out the rights, responsible parties, legal obligations and evidence of readiness. If any essential task still has no one responsible for it, postpone granting the rights.