What is the Difference Between a Franchise and Management Agreement?

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 management agreement are both agreements typically used by franchisors. However, a management agreements are more uncommon and typically used as an alternative to a corporate or franchisee run store. As with any business decision, it is important you understand the advantages and risks of both business models. This article will discuss the differences between these agreements. 

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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 that is 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 trademarks; and 
• operate your business using their business structure and systems.

What is a Franchise Agreement? 

The franchise agreement is one of five key documents that must be issued by franchisors. It is the formal agreement between you and any franchisee. Additionally, the Franchising Code of Conduct requires that these documents are issued to all franchisees.

A franchise agreement will generally include details of the:

• key business terms;
• franchisee’s obligations; 
• franchisor’s obligations; and
• procedures that will be relevant to the operation of the business.

What is a Management Agreement?

A management agreement is an agreement between a business owner and operator, that 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 in the sense that it allows another party to operate one of your businesses. However, you will maintain ownership of the business, but the operator will be responsible for the day-to-day running of the business. Management agreements are relatively uncommon but can be useful in the franchising industry in a pinch.

What Are the Key Differences Between a Franchise and Management Agreement?

The main differences between these two types of agreements are set out below:

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 obtaining trade marks, and developing tested business procedures and the operations manuals;
• the franchisor only receives a percentage of the franchisee’s revenue;
• the franchisee retains most of the revenue;
• 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 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 to run a franchise while finding a new suitable franchisee. However, as with any business decision, it is important to do your own research to gain a full understanding of your business expansion options. If you have any questions about the legal requirements and implications of a franchise or management agreement, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

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