Planning for the Termination of Franchise Agreements in Indonesia

Before offering a business as a franchise, owners need to plan how to bring the relationship to an orderly end. A termination clause is more than protection against a partner breaching the rules. It also helps both parties understand the exit process, settle their obligations and avoid leaving customers unsupported. In franchising, that certainty is just as important as the plan for opening an outlet.

1. Distinguish between grounds and routes for termination

Indonesia’s Government Regulation No. 35 of 2024 on Franchising requires franchise agreements to include, at a minimum, procedures for renewal and termination. It also affirms the parties’ equal legal standing and the application of Indonesian law. Termination should therefore be designed as a clear procedure, not an unlimited unilateral power.

Distinguish between a contract expiring at the end of its term and being terminated early. For early termination, set out separate routes for termination by mutual agreement and termination following a breach of obligations. Each route needs clear triggers, notice requirements, an effective date and understandable consequences.

Avoid vague grounds such as “the partner is no longer a good fit for the brand”. Use obligations that can be checked, such as unauthorised use of the brand, breaches of safety standards or payments that remain overdue after the notification process has been followed.

Also consider the possibility that the franchisor may fail to fulfil its obligations. If promised support is not provided, the franchisee needs a clear route for giving notice and resolving the issue. Do not draft the contract as though only one party could commit a breach.

Ask a legal adviser to check that these mechanisms comply with Indonesian contract law, including whether particular legal steps are needed when termination is disputed. Do not assume that including a clause automatically makes every termination action lawful.

2. Set out notice requirements and opportunities to remedy breaches

For breaches that can be remedied, establish a written process. The notice should identify the obligation breached, the underlying events, supporting evidence, the remedial action required and the deadline for completion. Also specify the official delivery address and channels so that receipt of the notice can be proved.

The period allowed to remedy a breach must be reasonable for the type of problem. Missing administrative documents are different from conditions that could endanger customers. Do not present a deadline you have set yourself as a government requirement.

Use the following sequence as a basis for your internal procedure:

• A staff member records the incident and gathers relevant evidence.
• An authorised person checks the contractual basis for the alleged breach.
• Notice is sent through the agreed channel.
• The partner responds and, where relevant, provides a remedial action plan.
• The outcome of the remedial action is checked before the next decision is made.

Specify who has the authority to confirm that the breach has been remedied. Without a designated person responsible, the partner may believe they have met the requirements while head office still considers the breach ongoing.

In urgent situations, distinguish between temporary protective measures and a decision to terminate the contract. Suspending sales of a potentially unsafe product, for example, need not automatically end the entire franchise relationship. The legal basis, scope and follow-up process for such action should be reviewed by a legal adviser.

3. Plan obligations after the agreement ends

Termination is not complete when the letter is sent. Prepare a list of obligations that apply from the effective termination date, identifying who is responsible for each and what evidence will confirm completion.

Ending the use of brand identity. Set out requirements for removing signage, branded uniforms, packaging and branding on online accounts and directories managed by the partner. Distinguish between assets owned by the partner and the right to use the brand, which ends with the contract.

Dealing with customer orders. Specify how paid orders, deposits, prepaid services and refund requests will be handled. Customer communications should explain whom to contact without disclosing unnecessary details of the dispute.

Calculating final amounts due. Set a transaction cut-off date, specify the documents needed to reconcile invoices and establish a timetable for settling outstanding balances. Do not assume that termination automatically cancels debts or requires all fees to be refunded. These rights and obligations need to be clearly stated and legally reviewed.

Handling stock and access. Agree what will happen to materials, branded packaging, operating documents and access to applications. If stock is to be bought back, specify eligibility criteria, the valuation method and transport costs. Do not promise a buyback if the business cannot yet afford it.

Prepare a formal completion record identifying obligations that have been fulfilled and those still outstanding. Avoid requesting a declaration that “all obligations have been fulfilled” while invoices or customer orders remain unresolved.

4. Test the procedure before recruiting franchisees

Run a termination simulation using a company-owned outlet as an administrative test case. Involve the operations, finance and marketing teams, along with a legal adviser. Test whether they can determine the final trading date, calculate outstanding balances, transfer responsibility for customer enquiries and revoke access without losing important records.

Check that the promises made during the sales process match the contract. If prospective franchisees have been given the impression that they can leave at any time without consequences, but the contract imposes different obligations, correct that explanation before signing. Allow time to discuss termination scenarios, not just potential profits.

Practical step: before offering a franchise, prepare a single termination checklist covering triggers, notices, opportunities to remedy breaches, the effective date and final obligations. Make sure each step has a designated person responsible and a contractual basis that has been reviewed.