Setting Out Franchise Fee Payment Procedures

Agreeing on franchise fees does not necessarily ensure that payments run smoothly. Invoices may arrive late, bank details may change, or payments may be recorded against the wrong outlet. Before franchising a business in Indonesia, business owners need to establish payment procedures that both parties can follow. Within a franchise network, sound administration helps maintain trust without turning every discrepancy in the records into a dispute.

1. Make payment procedures part of the agreement

Indonesia’s Government Regulation No. 35 of 2024 on Franchising requires franchise agreements to include, among other things, procedures for paying franchise fees. Simply stating the initial fee or royalty percentage therefore does not explain all the arrangements needed to fulfil those obligations.

The regulation also places franchisors and franchisees on an equal legal footing, with Indonesian law governing their agreements. Payment procedures should therefore explain both parties’ obligations: the franchisee pays in accordance with the agreed terms, while the franchisor provides clear invoice details and keeps accurate records of payments received.

Distinguish between core contractual terms and administrative instructions. The types of fees, the events that trigger payment obligations, due dates and the consequences of late payment should be set out in the agreement or a schedule forming part of it. Invoice formats and addresses for sending documents can be covered in administrative instructions referenced in the agreement.

Avoid broad provisions such as “payments are subject to head office policy” without defining their limits. Administrative instructions should not become a means of changing commercial obligations unilaterally.

2. Map the process from obligation to invoice

Create a payment matrix for each type of fee actually charged. The aim is not to recalculate the rates, but to establish when each obligation arises and how it is invoiced.

For each type of payment, record:

• Trigger for the obligation: for example, signing the agreement or the end of a billing period.
• Basis for the invoice: the relevant contractual clause and supporting documents.
• Invoice issuer: the party contractually entitled to receive payment.
• Invoice recipient: the name of the business entity or individual that is party to the agreement.
• Payment deadline: a specified date or a deadline calculated from a clearly defined event.
• Evidence of settlement: documents showing that payment has been received and allocated.

Also define the relationship between invoice issuance and the payment due date. Does payment remain due on a specified date even if the invoice is sent late? Or does the payment period only begin once the invoice is received? This must be agreed in advance, rather than decided after a delay has occurred.

Specify an official email address and a backup contact. If invoices are sent only to one employee who subsequently leaves, the payment process may stall even though the franchisee is ready to pay.

Seek a tax review based on the type of payment and the parties’ tax status. Explain whether the amounts include applicable taxes, how withholding will be handled where required, and who must provide the tax documentation. Do not assume that all fees receive the same tax treatment.

3. Secure payments and transaction matching

Specify the authorised bank account for payments and identify the account holder. If payment is directed to someone other than a party to the agreement, first check the basis of their authority and the legal implications. The aim is to ensure that the payment genuinely discharges the franchisee’s obligation.

Changes to bank details should follow a verification procedure. For example, notification could be issued by a designated officer and confirmed through an established official contact number. Do not rely solely on a text message from an unfamiliar number to change the destination of a bank transfer.

Use invoice numbers and outlet codes to help match transactions. Also specify who bears transfer charges, so that the amounts received do not repeatedly produce small discrepancies.

The agreement should explain when payment is deemed to have been received. Evidence of a transfer instruction shows that a transaction has been initiated, but does not always prove that the funds have arrived. Keep separate internal statuses for “payment evidence sent”, “funds received” and “payment matched”.

Before recruiting franchisees, run a simulation with the finance team: issue a sample invoice, record a part-payment and reconcile the balance. If staff still have to guess how to allocate the payment, the procedure is not ready for use.

4. Provide for corrections without obscuring obligations

Establish a dedicated channel for invoice queries. Franchisees need to know whom to contact with an objection, which documents to provide and how they will be notified of the outcome of the review.

For example, a single transfer may cover two invoices but be recorded against only one. The solution is to check the allocation, rather than immediately treating the franchisee as being in arrears. Conversely, raising an objection does not automatically remove the payment obligation; the treatment of disputed and undisputed amounts needs to be agreed.

Set out how overpayments, part-payments and invoice corrections will be handled. If late-payment penalties apply, their calculation, the point at which they begin to accrue and the notification procedure should be clear and legally reviewed. Do not add penalties that have no basis in the agreed terms.

Explain these arrangements to prospective franchisees before signing. Government Regulation No. 35 of 2024 requires the franchise offering prospectus to be provided at least 14 calendar days before the agreement is signed. Use the pre-contract explanation process to ensure that prospective franchisees understand their payment obligations, rather than merely receiving a list of fees.

Practical step: prepare one payment matrix, one sample invoice and one correction procedure. Check all three against the agreement before using them with your first franchisee.