Restaurant Management Agreements: The Advantages and Pitfalls

With so many different styles of operation and ownership available, there is no cookie-cutter formula for restaurant formation.

Sole proprietorships, partners, concept creators and private equity investors, and corporate minichains are but a few of the varieties one can find just on one busy urban corner. Further, there are many different types of owners, from culinary professionals to ex-restaurant managers, to Mom and Pop who make delicious fried chicken at home and are told by their friends that they should start their own restaurant.

These different owners have as many different reasons for using management agreements. For example, a company may enter into a management agreement with the owner as a kind of employment agreement. The multiunit operator may form a management company as a way to streamline back-office responsibilities and expenses for those units. Additionally, owners may employ an outside, third-party management company to run various aspects of the restaurant, up to and including all operations. Management agreements are very effective tools in streamlining restaurant operations. They can cover everything from detailing responsibilities for employee matters. For simplicity's sake, we will look at the management agreement from two perspectives: in house and outside. In both cases the restaurant will be referred to as the "owner," and the management company will be the "operator."