Planning for the End of a Franchise Agreement in Indonesia

Before franchising an established business, owners need to plan not only how the relationship will begin, but also how it will end. Clear exit rules help protect customers, safeguard the brand and reduce disputes. Within the franchise community, discussing these arrangements is not a sign of distrust: it lays the foundations for a more transparent relationship from the outset.

1. Distinguish between expiry and termination

Do not use a single short clause to cover every situation. An agreement reaching the end of its term is different from one terminated for breach. Ending an agreement by mutual consent also requires its own procedure.

Set out at least these three routes:

• Expiry: specify when the parties will discuss renewal, how notice must be given and what happens if no new agreement is reached.
• Termination by mutual consent: document the effective date, the settlement of outstanding obligations and the allocation of responsibilities during the transition.
• Termination for breach: define the breaches that may trigger termination, the evidence required, the notice procedure and any opportunity to remedy the breach where appropriate to its nature.

The main legal framework to refer to is Government Regulation No. 35 of 2024 on Franchising, which repealed Government Regulation No. 42 of 2007. It governs franchising under agreements in which the parties have equal legal standing and Indonesian law applies. Procedures for renewal, ending the agreement and termination are among the matters that must be addressed.

Do not simply copy an old contract template without reviewing it. Ask a legal adviser to check that the wording complies with current requirements and suits your business circumstances.

2. Create a workable procedure for handling breaches

Phrases such as “damaging the brand” are too broad without supporting criteria and procedures. Operations teams need a sufficiently clear basis for distinguishing between administrative oversights, failures to meet quality standards and conduct that puts customers at risk.

When designing the commercial arrangements, group breaches according to their impact. A late sales report might be remedied following written notice. A safety breach may require certain activities to be suspended while an investigation takes place. Such interim measures should be distinguished from permanently terminating the relationship.

For each category, specify:

1. Who is authorised to investigate and receive the franchisee’s response.
2. What evidence will be used, such as inspection reports, transaction records or product documentation.
3. How notice will be sent and when it will be deemed received.
4. The agreed period for remedying the breach, if one is offered.
5. How remedial action will be verified and decisions recorded.

Any remedy period should reflect the risks involved and the feasibility of the required action. Do not present a commercially chosen timeframe as a statutory deadline.

Address the franchisor’s obligations too. If supplies or system access are disrupted because of a fault at head office, the agreement should provide a route for complaints and resolution. A mechanism that only penalises franchisees can escalate conflict and overlook the underlying cause.

3. Draw up a transition plan for outlets and customers

The contract’s end date does not mark the end of all the work. Without a transition plan, an outlet may stop using the brand while still accepting orders through old accounts. Customers may then be unsure who is responsible.

Prepare a transition schedule covering at least four areas of work.

Branding and outlet identity. Specify when the use of signage, uniforms, packaging, promotional materials and digital branding must cease. Explain who will check compliance and how evidence of completion will be retained.

Stock and equipment. Distinguish between items owned by the franchisee, leased items and property belonging to the franchisor. If stock will be bought back, set out eligibility criteria, valuation methods, transport costs and payment timing. Do not promise a buyback without the funding to deliver it.

Orders and customer obligations. Assign responsibility for outstanding orders, deposits, complaints, warranties and vouchers that remain valid. Customer communications should explain where to obtain help, rather than simply announcing the closure.

Systems and information. Map access to point-of-sale systems, ordering accounts, email and confidential documents. The return or deletion of customer data must take account of lawful retention obligations and Law No. 27 of 2022 on Personal Data Protection. Do not assume that all data may automatically be transferred to head office.

4. Test the clauses before offering franchises

Run a simple scenario: a franchisee decides not to renew while still holding stock, having unfulfilled orders and facing bills whose amounts have not yet been agreed. Ask the operations, finance and legal teams to explain their respective tasks under the draft agreement.

If their answers depend on “we’ll discuss that later”, the clauses are not yet sufficiently workable. Create a closure checklist identifying responsible parties, agreed deadlines, handover documents and a process for resolving discrepancies in the final accounts. Also establish a dispute resolution route consistent with the agreement.

Exit rules should be discussed before signing, not introduced once the relationship has deteriorated. Government Regulation No. 35 of 2024 requires the franchise offering prospectus to be provided at least 14 calendar days before the agreement is signed. The franchisor must also hold a Franchise Registration Certificate, known as an STPW, before entering into a franchise agreement. Do not assume that contract discussions replace these obligations.

Practical step: before recruiting franchisees, complete a transition schedule and test it against an outlet closure scenario. Workable exit rules help the franchise community maintain trust, even when a business relationship has to end.