Defining Territories in Franchise Agreements in Indonesia

When a business starts franchising, the promise of ‘one partner per territory’ sounds straightforward. But who can fulfil orders from outside their territory? Can the brand owner open its own outlet near a franchisee? In a franchise network, this kind of uncertainty can undermine trust. Territorial arrangements therefore need to be designed before an offer is made, not after two outlets start competing for the same customers.

1. Distinguish legal requirements from commercial choices

The main reference is Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. It governs franchise operations, including agreements, offering prospectuses and the franchise registration certificate, known locally as the Surat Tanda Pendaftaran Waralaba, or STPW. The business territory is one of the matters that must be covered in a franchise agreement.

However, the requirement to specify a territory does not mean that every franchisee automatically receives exclusive rights. The extent of protection, any exceptions and how the arrangements will work must be clearly stated. Do not rely on assurances from sales staff or maps in presentations that do not form part of the agreement.

Government Regulation No. 35 of 2024 also requires franchisors to hold an STPW before entering into a franchise agreement. The offering prospectus must be provided to the prospective franchisee at least 14 calendar days before signing. Use this review period to explain the proposed territory and all its exceptions, rather than introducing significant restrictions on the day of signing.

Contract terms must also take account of Indonesian law, including relevant competition rules. Ask a legal adviser to assess territorial or customer restrictions; do not assume that all restrictions are automatically permitted simply because they appear in a franchise agreement.

2. Define what is actually protected

Start with this question: does the protection cover the opening of outlets, active marketing or all transactions? These are three different things. Prohibiting new outlets in an area does not automatically prevent customers from that area shopping at another outlet.

Choose an arrangement that suits the business model:

• Exclusive territory: the franchisor grants the franchisee specified protection within agreed boundaries. Explain whether this protection also restricts the franchisor’s own outlets.
• Non-exclusive territory: the franchisee operates at a particular location or within a defined area, with no guarantee that other outlets will not operate there.
• Site-specific protection: the arrangement covers only a particular site, such as a single shopping centre, rather than an entire subdistrict, known in Indonesia as a kecamatan.

Next, attach a map to the agreement. Include road boundaries, coordinates or administrative boundaries that can be readily checked. If using a radius, specify the centre point and the measurement method: straight-line distance differs from driving distance.

Do not set the size of a territory solely on the basis of a prospective partner’s preferences. Review where customers of existing operations come from, journey times, service capacity and potential expansion. This information helps prevent the allocation of territories that are too large to serve effectively.

The appendix should also explain how changes to administrative boundaries will be treated. The subdivision of an administrative area should not silently alter commercial rights. State that any change to territorial coverage must follow an agreed procedure.

3. Set rules for online orders and special sales channels

Physical territorial boundaries often become blurred when customers order through apps. Distinguish between the customer’s location, the location where the order is processed and the location where the goods are handed over. Do not promise that all sales to residents of a particular subdistrict belong to the outlet there if the ordering system cannot support that arrangement.

Test the draft agreement against several real-world situations:

• A customer within a franchisee’s territory chooses to collect an order from another outlet.
• A delivery platform displays two outlets with overlapping delivery areas.
• Head office receives a corporate order requiring deliveries across several territories.
• The franchisor wants to open a temporary outlet at an event within a franchisee’s territory.

For each situation, decide who receives the order, who fulfils it and who handles complaints. If revenue is to be shared, explain how it will be calculated and recorded in the relevant agreement.

Special channels such as online marketplaces, catering, mobile outlets and transport hubs need to be discussed openly. Overly broad exceptions can render a promise of exclusivity meaningless. Conversely, unrealistic guarantees of absolute protection can hinder customer service.

4. Establish procedures for changes and resolving objections

A territory that is appropriate when an outlet opens may no longer be suitable as customer traffic patterns change. Even so, avoid clauses that allow the franchisor to reduce a territory unilaterally without clear reasons and a defined process.

If protection is linked to performance, use verifiable measures that are reasonably within the franchisee’s control. Explain the data sources, assessment period, opportunity to improve performance and how circumstances such as road access closures will be taken into account. Sales targets are not a guarantee of profit.

Before approving a new outlet, check all territorial appendices that remain in force. Assign responsibility for identifying potential conflicts and retaining the assessment records. If a franchisee’s consent is required, obtain it in writing before making any commitment to a site.

Provide a route for raising objections: written notification, an exchange of data, a meeting to seek a resolution and then the dispute resolution mechanism set out in the agreement. Every territorial change must be documented and its legal implications reviewed.

Practical step: before offering your first territory, prepare a map, a list of sales channels and several scenarios involving conflicting orders. Make sure prospective partners and the head office team share the same understanding of the outcomes before signing the agreement.