In Short
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A franchise agreement and a management agreement serve different legal purposes and impose different obligations.
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Franchise agreements grant rights to use a brand and business system, while management agreements govern operational control.
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Misclassifying agreements can create legal risks and misunderstandings about rights and responsibilities.
Tips for Businesses
Carefully identify the type of agreement you need before negotiating with partners. Check which rights you are granting or receiving, and what obligations each party has. Have a lawyer review your draft to ensure clarity on control, reporting and termination rights. Ensure the agreement matches the actual business relationship.
Summary
This article explains the legal differences between franchise and management agreements for business owners in Australia. It clarifies how each contract works and is prepared by LegalVision’s business lawyers, who specialise in advising clients on franchising and commercial agreements.
On this page
- What is a Franchise?
- What is a Franchise Agreement?
- What is a Management Agreement?
- What Are the Key Differences Between a Franchise and Management Agreement?
- What Are the Benefits and Risks of a Franchise Agreement?
- What Are the Benefits and Risks of a Management Agreement?
- Key Takeaways
- Frequently Asked Questions
If you operate a successful business, you may be looking for ways to grow and expand. Therefore, you may be considering using a franchise or management model. A franchise agreement and a management agreement are both agreements typically used by franchisors. However, management agreements are more uncommon and typically used as an alternative to a corporate or franchisee-run store. As with any business decision, you must understand the advantages and risks of both business models. This article will discuss the differences between these agreements.
What is a Franchise?
Franchising is a business system developed by a franchisor and licensed to franchisees. The franchise network is made up of similar or identical businesses, that are operated by independent business owners (the franchisees). These franchisees use the marketing structure and intellectual property controlled and owned by the franchisor.
You can enter a franchise by signing a franchise agreement. In this agreement, the franchisor grants you the right to:
- use their intellectual property and trade marks; and
- operate your business using their business structure and systems.
Franchising is also a highly regulated industry governed by the Franchising Code of Conduct (the Code). This mandatory industry code governs numerous aspects of the relationship between franchisors and franchisees. It outlines their mutual rights and responsibilities, specifies required inclusions in franchise agreements, and prohibits certain exclusions. The Code aims to promote fairness and transparency in franchising arrangements.
What is a Franchise Agreement?
The franchise agreement is one of five key documents that must be issued by franchisors. It is a legally binding contract that defines your relationship with the franchisee. The agreement will include the franchisee’s obligations regarding:
- payment of fees;
- marketing;
- training; and
- supply of products.
It will also include your obligations, such as:
- your duties to the franchise;
- procedures for contract execution;
- modification;
- termination and transfer; and
- required documentation.
A franchise agreement will generally include details of the following:
- key business terms;
- franchisee’s obligations;
- franchisor’s obligations; and
- procedures that will be relevant to the operation of the business.
The Franchising Code of Conduct requires that franchise agreements are issued to all franchisees alongside the:
- disclosure document;
- key fact sheet;
- copy of the Franchising Code of Conduct; and
- information statement.
This factsheet sets out the three key financial disclosure obligations every franchisor needs to comply with.
What is a Management Agreement?
A management agreement is an agreement between a business owner and an operator. This gives the operator the right to run the business. It may also be referred to as an operating agreement. A management agreement is similar to a franchise agreement, allowing another party to operate one of your businesses. You will maintain ownership of the business, but the operator will be responsible for the day-to-day running of the business. The management agreement typically specifies the operator’s:
- responsibilities;
- compensation;
- performance targets; and
- reporting requirements.
Management agreements are relatively uncommon but valuable in the franchising industry, where you want to employ someone to manage one of your stores.
What Are the Key Differences Between a Franchise and Management Agreement?
The main differences between these two types of agreements are set out below:
Franchise Agreement |
Management Agreement | |
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What rights are granted in the agreement? |
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What are the key obligations in the agreements? | Key obligations include the: | Key obligations include that the: |
What Are the Benefits and Risks of a Franchise Agreement?
There are many benefits to expanding through the franchise model. These include:
- franchisees will pay the bulk of the expansion set-up costs;
- reduced legal risk for the franchisor as franchisees will enter the lease and hire their own employees;
- franchisees will be responsible for the day-to-day management of the franchise and have skin in the game to ensure performance; and
- you will receive ongoing fees while the franchisee operates.
However, the disadvantages of franchising include:
- higher upfront costs for obtaining trademarks and developing tested business procedures and operations manuals;
- the franchisor only receives a percentage of the franchisee’s revenue;
- the franchisee retains most of the revenue;
- more legal regulations to comply with;
- less control over the business while the franchisee is operating; and
- it is more difficult to affect changes to business processes and adapt to change.
What Are the Benefits and Risks of a Management Agreement?
The advantages of using a management system to expand include:
- you will maintain ownership of the business;
- you will still have control of the business while not being involved in the day-to-day operations;
- your operator will be an experienced business operator;
- you will receive the bulk of the business profits, provided your operator is agreeable; and
- you will not need to follow the Franchising Code of Conduct.
However, the disadvantages of using a management system include:
- you will be responsible for the business set-up costs and ongoing expenses;
- you are still the business owner, so you are responsible for its liabilities;
- only certain types of operators will be willing to take on the risk and liability associated with management agreements;
- you will likely have to pay high wages, so the operator is fairly compensated for taking care of the day-to-day operations;
- in some cases, it may be easier to hire a manager as an employee;
- there can be issues with who should hold public liability insurance; and
- you are still responsible for many of the legal risks of the business.
Key Takeaways
Franchise and management agreements are both methods of expanding your business. Therefore, your choice between these options should consider the nature of your business and the amount of ongoing control you need. Management agreements can be a great short-term solution for running a franchise while finding a new suitable franchisee. However, as with any business decision, it is essential to do your research to gain a complete understanding of your business expansion options.
LegalVision provides ongoing legal support for franchisees and franchisors through our fixed-fee legal membership. Our experienced lawyers help businesses in the franchising industry manage contracts, employment law, disputes, intellectual property and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 1300 544 755 or visit our membership page.
Frequently Asked Questions
The franchise agreement is the formal agreement between you and any franchisee. Moreover, it provides franchisees with the intellectual property rights and know-how to operate the franchise business.
It is an agreement between a business owner and operator that gives the operator the right to run the business. Additionally, it is similar to a franchise agreement as it allows another party to operate one of your businesses. However, you will maintain ownership, while the operator is responsible for the day-to-day running of the business.
The Franchising Code of Conduct significantly impacts franchise agreements but does not apply to management agreements. Franchise agreements must comply with the Code’s requirements, including mandatory document disclosures and specific franchisor-franchisee relationship regulations. On the other hand, management agreements are not subject to these regulations. They offer more flexibility but potentially less protection for the operator.
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