5 Costly Mistakes to Avoid When Signing a Management Agreement
A solid management agreement can be the difference between a thriving business and a legal or financial disaster. Whether you're hiring a property...
6 min read
A bad management agreement can be a business owner's worst nightmare—locking you into high fees, giving away too much control, or tying you up in a contract that's nearly impossible to exit. Unfortunately, many business owners sign these agreements without fully understanding the fine print—only to regret it later.
Whether you’re hiring a management company to oversee daily operations, handle finances, or improve efficiency, it’s critical to spot red flags before signing. This guide will break down the most dangerous pitfalls in management agreements and show you how to negotiate better terms to protect your business.
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Why Management Agreements Matter
A management agreement is a legally binding contract between a business owner and a management company that defines:
- Responsibilities – What exactly is the management company in charge of?
- Compensation – How are they paid (flat fee, revenue share, performance-based)?
- Decision-Making Power – Who controls finances, hiring, and key business decisions?
- Termination Conditions – How can you exit the agreement if things go south?
These agreements are common in industries like hospitality, real estate, healthcare, and franchises, but every business owner should approach them with caution. If the terms aren’t crystal clear and fair, you could find yourself paying for services you don’t need, losing authority over your own business, or being trapped in a long-term contract with no easy way out.
1. Vague or Overly Broad Responsibilities
Red Flag: The agreement lacks specificity in defining what the management company is responsible for—or gives them too much undefined power.
Some contracts include generalized language like "the management company shall oversee all business operations." This sounds reasonable, but without clear limitations, it could allow them to take control over major financial decisions, hiring, and even strategic direction—without your approval.
Example – When “General Oversight” Went Too Far
A restaurant owner signed a management agreement that said the company would “handle all daily operations.” Within six months, they had changed the menu, fired key staff, and made major financial decisions—all legally allowed under the vague contract. The owner lost control over their own business and had no legal recourse to stop it.
What to Look for Instead
- Define responsibilities clearly—break down tasks like marketing, HR, financial oversight, and vendor negotiations.
- Specify limits—Does the management company need your approval to hire employees or sign contracts?
- Include performance standards—What benchmarks (e.g., revenue targets, efficiency goals) must they meet?
Pro Tip – Never Sign a Vague Management Agreement
Without a detailed breakdown of responsibilities, a term is vague. Ask for specific clarifications in writing.
2. Unfair Compensation Structure
Red Flag: The management company gets paid regardless of performance—or has hidden fees that significantly cut into your profits.
Many management agreements seem fair on the surface, but when you dig deeper, you might find payment structures that heavily favor the management company—at your expense.
Example – The Hidden Fees Nightmare
A hotel owner signed a deal where the management company earned 10% of gross revenue. What they didn’t realize was that the company also charged additional “administrative fees” of $5,000 per month—eating into profits far more than expected.
What to Look for Instead
- Make sure incentives are aligned—If they earn more money when you lose money, that’s a problem.
- Understand revenue-sharing models—Are they taking a percentage of gross revenue or net revenue? (Taking from gross means they make money even if your business is unprofitable.)
- Demand full transparency on additional fees—Are there "administrative fees," travel expenses, or marketing costs that aren’t clearly disclosed?
Pro Tip – Request a Full Breakdown of Fees
Before signing, make sure you demand transparency in writing. Negotiate a structure where the management company only profits when your business profits.
3. One-Sided Termination Clauses
Red Flag: The agreement locks you in for years with no easy exit, while the management company can leave with minimal consequences.
Many management agreements are designed to favor the management company, meaning they can quit with a short notice period, but you might be stuck paying fees or penalties if you want to exit early.
Example – The Unbreakable Contract
A retail business owner signed a five-year management agreement that didn’t allow early termination unless the management company breached the contract. When the company underperformed and mismanaged finances, the owner couldn’t get out without paying two years' worth of fees as a penalty.
What to Look for Instead
- Mutual termination rights—Can you end the contract without cause or only if they breach?
- Reasonable notice periods—Avoid agreements requiring 6-12 months’ notice before termination.
- Fair exit terms—Check if you’ll owe a penalty or still have to pay for unused services.
Pro Tip – Negotiate a Termination Clause
Make sure your clause allows that you to exit with reasonable notice (e.g., 30-90 days) and without excessive financial penalties.
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4. Lack of Accountability for Poor Performance
Red Flag: The contract doesn’t set measurable standards or penalties if the management company fails to deliver results.
Some agreements only define responsibilities, not expectations—meaning the management company still gets paid even if they do a terrible job.
Example – Paying for Failure
A property owner hired a management firm to increase rental occupancy. Despite a 30% vacancy rate, the firm still collected full fees every month—because the contract had no performance requirements.
What to Look for Instead
- Clear performance metrics—Define Key Performance Indicators (KPIs) like revenue growth, cost savings, or customer retention.
- Regular reviews and adjustments—Include quarterly performance evaluations to assess effectiveness.
- Compensation tied to performance—Consider incentive-based pay where part of their earnings depends on hitting targets.
Pro Tip – Ensure Your Contract Includes Measurable Performance Goals
This is key for you to add a clause allowing you to reduce fees or terminate the contract if they underperform.
5. Overreaching Authority in Decision-Making
Red Flag: The agreement gives the management company too much control over hiring, finances, and contracts.
While some oversight is expected, no owner should lose control over key decisions that impact their business long-term.
Example – A Business Owner Lost Control
A fitness center owner signed an agreement that allowed the management company to "handle all staffing decisions." Within six months, they fired long-time employees, replaced them with cheaper staff, and damaged customer relationships. The owner had no legal way to override these changes.
What to Look for Instead
- Approval requirements for major decisions—Ensure you must approve large expenses, staffing changes, or new contracts.
- Financial safeguards—Does the management company control bank accounts? If so, set spending limits.
- Contract limitations—The agreement should prevent them from signing long-term deals on your behalf without approval.
Pro Tip – Retain Final Approvals
Major business decisions should be decided by you to avoid losing control of your company.
6. No Defined End Date or Unclear Renewal Terms
Red Flag: The agreement automatically renews or has an indefinite term with no clear way to renegotiate.
Many management agreements include automatic renewal clauses, meaning unless you actively terminate, you could be stuck in another contract cycle without realizing it.
Example – The Never-Ending Agreement
A restaurant owner thought they had a three-year agreement—until they realized it automatically renewed every year unless they gave six months’ notice. They missed the deadline and were locked in for another full year.
What to Look for Instead
- Fixed contract term—Avoid indefinite agreements; instead, set a clear end date (e.g., one or three years).
- Owner approval for renewal—The agreement should require you to actively renew instead of automatic extensions.
- Performance-based renewal—Tie renewals to meeting performance goals.
Pro Tip – Clarify Renewal Terms
Before signing, make sure you have complete clarity. If it includes automatic renewal, negotiate for owner approval instead.
Protecting Yourself Before Signing a Management Agreement
Before signing any management agreement, protect yourself by following these key steps:
Hire an Attorney
Even if a contract seems standard, small wording changes can make a huge difference in your rights and obligations.
Negotiate Key Terms
Never assume a contract is non-negotiable—almost everything is up for discussion.
Ask for References
Speak to other businesses that have worked with the management company to identify past issues.
Get Everything in Writing
Verbal promises mean nothing if they aren’t in the signed contract.
The Bottom Line
A bad management agreement can drain your profits, strip your control, and lock you into a bad deal. But by watching for red flags, negotiating strong terms, and getting legal help, you can protect yourself and ensure the agreement works in your favor.
Before signing, ask yourself:
- Are the management duties clearly defined?
- Is the compensation structure fair and transparent?
- Can I terminate the agreement without massive penalties?
- Are there performance benchmarks to hold them accountable?
- Does the contract protect my authority as the business owner?
- If any of these answers are "No", you need to renegotiate the terms—or walk away.
Do I need a lawyer for my business?
The biggest question now is, "Do I need a lawyer for this?” For most businesses and in most cases, you might not need a lawyer for simple contract issues. Instead, many business owners rely on Legal GPS Pro to help with their legal needs.
Legal GPS Pro is your All-In-One Legal Toolkit for Businesses. Developed by top startup attorneys, Pro gives you access to 100+ expertly crafted templates including operating agreements, NDAs, and service agreements, and an interactive platform. All designed to protect your company and set it up for lasting success.
Legal GPS Pro
Protect your business with our complete legal subscription service, designed by top startup attorneys.
- ✅ Complete Legal Toolkit
- ✅ 100+ Editable Contracts
- ✅ Affordable Legal Guidance
- ✅ Custom Legal Status Report
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