A management agreement allows one entity to take operational control of another business, saving the client costs associated with hiring management personnel. The agreement specifies the scope of responsibilities, fees, and duration of the contract.
A management agreement is a legal agreement that allows one entity to assume operational control of a separate business. The terms of the agreement will vary, depending on the extent of the responsibilities entrusted to the management body. With this form of outsourcing, the managing entity not only provides guidance to the client on how to effectively run the business, but actually assumes the management role and actively oversees the business operation function.
The purpose of a management contract is to provide a company with competent management personnel, without the need to actually hire such individuals. As with any type of outsourcing, this approach can save the client a lot in terms of wages and benefits such as health insurance, profit sharing, pensions and other perks that are usually part of management packages. Entering into a management agreement greatly simplifies the accounting process, as the client is usually not responsible for withholding taxes or other employee-related duties. Instead, the client pays a commission calculated using the criteria established in the terms and conditions of the management agreement.
There are several ways in which the fees associated with the management agreement can be determined. A common method is to request a fixed percentage of the gross operating profit that the customer makes under the vendor’s management. In some cases, this figure is based on total revenue received rather than operating income. There are also situations where the client will pay a fixed fee which remains the same regardless of any upward or downward movement in revenue or profit.
The scope of responsibilities that may be included in a management contract includes overseeing any or all areas of the client’s business enterprise. A contract may involve managing the accounting department, overseeing HR initiatives, direct management of a plant or facility, or even sales and marketing services related to the revenue generation process. In general, the contract will not only identify the areas in which management expertise will be made available, but will also ensure the necessary authority to perform those functions in a timely and effective manner.
The conditions of the management agreement also specify at least a minimum duration for the agreement to remain in force. It is not unusual for this type of contract to include a term of several years, with options that give both parties the option to terminate the contract, as well as options for renewal. Depending on the length of time covered by the contract, there may also be provisions to adjust the fee upwards to allow for changes in the economy over the years. This is especially true when the commission amount is fixed rather than correlated to the profits generated by the client during the period the agreement is in effect.
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