November 2025

Wednesday, 19 Nov 2025

Distorted Understanding of Franchising and Partnerships among MSME Actors and the Public

 

Amid economic uncertainty, more people are seeking side business opportunities to increase their income. One of the most popular business models among aspiring entrepreneurs is franchising. This system offers convenience using established brands, products, and operational systems, which can help reduce the risk of loss for new business owners.

However, despite its popularity, there remains widespread confusion, especially among Micro, Small, and Medium Enterprises (“MSME”) actors in distinguishing between franchising and partnerships. Many business collaboration offers are labeled as “franchises”, even though upon closer observation, the arrangement is a partnership, which carries different characteristics and legal implications. This misunderstanding may lead to operational and legal risks for the parties involved.

According to Law No. 20 of 2008 on MSMEs, a partnership is a business collaboration—either direct or indirect—based on mutual need, trust, empowerment, and benefit. Such partnerships involve MSMEs and larger enterprises and can take various forms, including nucleus-plasma, subcontracting, franchising, general trade, distribution and agency, supply chains, and other models such as profit-sharing, joint operations, joint ventures, and outsourcing. From this definition, it is clear that franchising is one form of partnership. However, to be classified as a franchise, the partnership must meet specific definitions and criteria outlined in prevailing regulations.

The definition of franchising in Indonesia was updated through Government Regulation No. 35 of 2024 (“PP 35/2024”), replacing Government Regulation No. 42 of 2007 (“PP 42/2007”). Under the new regulation, a franchise is defined as a special right held by an individual or a business entity over a business system that meets certain criteria, for the purpose of marketing goods and/or services that have proven successful, and which can be utilized by another party through a franchise agreement. The criteria for a business to be categorized as a franchise include: a fully documented business system; proven profitability with a minimum of three consecutive years of operation and audited financial statements for the last two years; registered intellectual property; and the ability to provide ongoing support to the franchisee.

Levita G. Supit, Chairwoman of the Permanent Committee for Franchise License and Networking Marketing at the Indonesian Chamber of Commerce and Industry (Kadin), stated in a Detik Finance article titled “Lessons from the Menantea Case: How to Differentiate a Franchise from a Partnership” April 14, 2023, that many businesses in Indonesia claim to be or deem as franchises even though they do not meet the necessary requirements particularly in terms of business age and partnership structure. Misunderstandings regarding this matter generally arise due to the public's lack of understanding about the requirements that must be met for a business to be categorized as a franchise. Many outlets and partners in a business are not sufficient to classify it as a franchise.

One of the businesses established during the COVID-19 pandemic (April 2021) and experienced rapid growth through (i) the expansion of outlets and (ii) the joining of numerous partners is the aromatic tea enterprise Menantea (“Menantea”). At the time Menantea was founded, the prevailing legal regulation governing franchises was PP 42/2007, which, among other requirements stipulated that a business eligible to apply for a Franchise Registration Certificate (“STPW”) must have demonstrated profitability for at least five years. Meanwhile, complaints from Menantea partners began to surface and gain public attention in March 2023, two years after Menantea was established.

The business partners initially agreed to join Menantea under the assumption that the business collaboration offered was a franchise model, wherein they would simply invest a certain amount of capital and, in return, gain the right to use the brand, products, and standardized operational systems managed by Menantea. Promises of profitability, operational ease, and the perception of a well-established business were key factors that attracted entrepreneurs to become partners. However, over time, various communication challenges emerged between central management and the partners. Many partners expressed concerns over the lack of financial transparency and insufficient managerial support, which ultimately led to outcomes that fell short of the promised profits. These grievances were conveyed directly to management as well as publicly through social media platforms.

Several legal consultants and franchise experts have scrutinized Menantea’s business model, highlighting that it did not meet the criteria to be classified as a franchise. Although Menantea had a documented business system and registered intellectual property with the Directorate of Trademarks, it did not fulfill the requirements for obtaining a STPW under PP 42/2007, which stipulates: (i) a minimum of five years of operation, and (ii) proven profitability during that period. The fact that Menantea was founded on April 10, 2021, and began offering partnerships on August 21, 2021, confirms this conclusion. According to various media sources, as of mid-2025, no formal legal resolution has been reached between Menantea’s management and its partners. This is reflected in a Kompasiana article dated July 2, 2025, as referenced in the following link [*]

The distorted understanding between franchise and partnership models necessitates greater caution among business actors in assessing whether a proposed venture truly qualifies as a franchise. The following are several key indicators to help determine whether a business genuinely operates as a franchise:

1. The existence of a written franchise agreement

   The agreement should clearly state the franchise partnership model and include key elements such as rights and obligations of both parties, use of trademarks, operational systems, training and support, as well as franchise fees and monthly royalties being the main features of a franchise.

2. Registered Intellectual Property (IP)

   A legitimate franchise has registered trademarks, logos, designs, patents, or other registered IP with the Directorate General of Intellectual Property.

3. Proven Business Model

   A legitimate franchise typically operates multiple successful business branches and maintains a standardized operational system. Under the latest franchise regulations outlined in Government Regulation No. 35 of 2024, which replaces the previous five-year requirement in Government Regulation No. 42 of 2007, the business must have been established for a minimum of three years.

4. Training and Support from the Franchisor

   The franchisor provides initial training and ongoing support to ensure consistent quality across franchisees.

5. Transparent Costs and Potential Profit

   Information about franchise fees, royalties, and estimated profits should be disclosed openly before signing the agreement.

6. Registered with an Official Franchise Association

   In Indonesia, a legitimate franchise has obtained an STPW from the Ministry of Trade and is generally registered with the Indonesian Franchise Association (AFI), the official national franchise association established in 1991.

By (i) understanding the differences between franchising and partnerships and (ii) recognizing the characteristics of a legitimate franchise, aspiring entrepreneurs can make wiser decisions when choosing a business collaboration that aligns with their goals and expectations. Likewise, large businesses seeking to establish partnerships must ensure that contractual clauses are properly structured and avoid creating false expectations or perceptions that the partnership is a franchise. In addition, both new entrepreneurs and established business owners must understand that the unauthorized use of franchise terms or logos may result in administrative sanctions and could even lead to criminal liability if such violations have widespread impact or contravene other legal provisions.

 

Disclaimer: This legal news serves as general guidance only and should not be treated as legal advice. If you wish to have further information on this topic, please contact  Diyah Ratnajati (dratnajati@rosetini.co.id), or Rosetini Ibrahim (ribrahim@rosetini.co.id).