The Difference Between Franchise Agreements and Management Agreements
As your business grows and expands, you may consider franchising or other expansion models. A franchise and a management agreement serve different legal purposes and impose different obligations.
A franchising agreement allows a franchisee to operate under a franchisor’s business brand in exchange for fees and royalties. Management agreements appoint a third party to operate the business on the owner’s behalf. They are similar, but the operational control that they give is very different. In this post I will break down that difference to help you understand which is best suited for your growing business.
Rights Granted In Each Agreement
A franchise agreement gives a franchisee the right to operate a business using the franchisor’s brand and system. They are given the right to use intellectual property and business systems. Access to financial information varies by agreement. These rights are regulated under the Franchising Code of Conduct, which is a mandatory industry code enforceable by the ACCC.
In a management agreement, a business owner gives the operator the right to run the business. The operator has the right to operate and manage the business while being paid for their services, but will not own the business themselves.
The main difference in the rights given by each agreement is that franchise agreements give the franchisee the right to use the business brand and systems, whereas management agreements give the operator the right over day-to-day operations. An operator has rights over the overall management of the business, whereas a franchisee only has rights to their portion of the wider business. This can give the impression that management agreements give the recipient more rights than franchise agreements do, but this is not always the case. Operators do not have the same rights to brand usage that franchisees do. Depending on the agreement structure, operators may owe fiduciary duties to the business owner.
Financial Structures of Each Agreement
In a franchise agreement, the franchisee typically pays initial franchise fees and ongoing royalties for brand usage. They invest capital, keep the profits (subject to royalty payments), and bear the primary financial risk of the business.
In a management agreement, the owner provides the capital investment and pays the operator for their services. The operator’s compensation may be structured as a fixed fee, performance-based fee, or a combination of both. The business profit (after payment of the management fee) goes to the owner, who also bears the financial losses. Therefore, operators typically carry less financial risk than franchisees and generally do not need to make the same level of capital investment.
Typical Industries for Each Agreement
Franchise agreements are common in fast food chains, retail stores, and education centres. These industries typically feature consistent branding, standardized operating models, and defined territories.
Management agreements are common in hotels and resorts, large commercial properties, resource projects, and private healthcare facilities. These industries have greater operational complexity, separate ownership of assets to operational expertise and are very capital-intensive.
Franchise agreements are more common, but that does not mean that they work for every business. Serious deliberation needs to be given to them both. If you are considering expanding your business through franchising or management arrangements and need guidance on which structure is right for you, please contact us for tailored advice.
DISCLAIMER: This article is for informational purposes only and does not constitute legal advice.