Reading time: 7 minutes

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. 

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.

This agreement will provide franchisees with the intellectual property rights and know-how to operate the franchise business. The franchisee will be the owner of the business. However, they will be required to adhere to the standards of the franchise brand and pay you ongoing royalty and franchise fees. 

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:

 
Franchise Agreement
Management Agreement

What rights are granted in the agreement?

  • a franchise agreement gives franchisees a ‘business in a box’;
  • franchisees will gain access to the brand’s intellectual property and insider business know-how in the operations manual; and
  • there might be a central marketing fund for the franchise.
  • the business operator will manage and operate the business on behalf of the owner. The operator will be paid for their services, but they will not own the business; and
  • the business operator may also use a business operations manual. However, you will typically select the operator on the basis of their skill and expertise.

What are the key obligations in the agreements?

Key obligations include that the:

  • franchisee will operate the business day-to-day;
  • franchisee must comply with the standards set out in the franchise agreement and operations manual;
  • franchisor may provide ongoing support to the franchisee and must comply with the Franchising Code of Conduct, particularly in relation to resolving disputes; and
  • franchisee will pay ongoing royalty and franchise fees.

 

Key obligations include that the:

  • operator will be responsible for the day-to-day running of the business but will be accountable to the owner;
  • operator will need to meet the standards and targets set out in the management agreement;
  • business owner will need to pay the operator accordingly; and
  • business owner will maintain overall legal responsibility for the business. Depending on the terms of the agreement, this may include complying with tax laws for the business, employment responsibilities for employees not involved in the management agreement, acquiring relevant permits and insurances for the business and premises and any obligations created by a lease on the premises.
  •  

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.

Frequently Asked Questions

What is a franchise agreement?

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.

What is a management agreement or operating agreement?

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.

Webinars

Australia’s Global Talent Visa: How to Attract Top Talent

Thursday 7 October | 11:00 - 11:45am

Online
Understand how to navigate Australia’s complex migration system to attract top overseas talent with our free webinar.
Register Now

5 Essential Contracts for your Online Business

Thursday 14 October | 11:00 - 11:45am

Online
Learn which key contracts will best protect your online business with our free webinar.
Register Now

Key Considerations When Buying a Business

Thursday 11 November | 11:00 - 11:45am

Online
Learn which questions to ask when buying a business to avoid legal and operational pitfalls, so you can hit the ground running. Join our free webinar.
Register Now

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

The majority of our clients are LVConnect members. By becoming a member, you can stay ahead of legal issues while staying on top of costs. From just $119 per week, get all your contracts sorted, trade marks registered and questions answered by experienced business lawyers.

Learn more about LVConnect

Need Legal Help? Get a Free Fixed-Fee Quote

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

Our Awards

  • 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year - Australasian Law Awards
  • 2019 Most Innovative Firm - Australasian Lawyer