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5 Costly Mistakes to Avoid When Signing a Management Agreement

LegalGPS : Apr. 17, 2025

12:19

A solid management agreement can be the difference between a thriving business and a legal or financial disaster. Whether you're hiring a property manager, a business operations firm, or a management company to oversee a key part of your operations, the terms of the agreement will dictate your financial and legal exposure.

Unfortunately, many business owners rush into signing these agreements without fully understanding the risks, leading to costly mistakes that could have been avoided. From vague compensation terms to unfair termination clauses, small oversights can have major consequences down the line.

To help you avoid these pitfalls, we’ll break down five of the most expensive and frustrating mistakes people make when signing a management agreement—and what you should do instead.

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Mistake #1: Vague or One-Sided Compensation Terms

A poorly structured payment agreement can drain your business’s profits before you even realize what’s happening. Many management agreements include ambiguous compensation terms that favor the management company, leaving business owners paying more than expected.

How This Mistake Costs You

Revenue-Based vs. Profit-Based Fees – Some agreements require paying a percentage of gross revenue instead of net profits. This means the management company gets paid even if your business is losing money.
Hidden Fees & Markups – Management companies may charge administrative fees, vendor markups, or bonus payments that aren’t obvious in the initial contract.
Guaranteed Compensation Regardless of Performance – If the contract doesn’t tie compensation to performance, you may be stuck paying even if the manager underperforms.

Example – The Restaurant Revenue Trap

A restaurant owner signs a management agreement with a firm that promises to boost sales. The contract states that the manager receives 5% of gross revenue each month. At first, this sounds reasonable—until the owner realizes that operating costs, payroll, and rent aren't factored in. Even when the restaurant struggles, the manager still collects their cut, putting the owner in a financial hole.

How to Avoid This Mistake

Clarify the Compensation Structure – Ensure you know exactly how the management company gets paid. Ideally, compensation should be tied to profits or specific performance goals.
Negotiate a Cap on Fees – Consider capping fees to prevent the management firm from earning disproportionately more than your business profits.
Watch for Additional Charges – Ask for a full breakdown of any extra fees or bonuses included in the agreement.

A well-structured compensation clause should reward good management, not just guaranteed income for the manager. Always review this section carefully before signing.

Mistake #2: Lack of Clear Termination Rights

Getting locked into a management agreement with no easy way out is a nightmare scenario for many business owners. If the contract doesn’t give you the right to terminate without excessive penalties, you could be stuck paying for poor service far longer than you’d like.

Why This Becomes a Costly Mistake

Many management agreements include one-sided termination clauses that favor the management company. Some require months of advance notice, hefty exit fees, or even an obligation to pay out the remainder of the contract regardless of performance. Others allow the management company to terminate the agreement whenever they want—while you have no such right.

Without a well-structured termination clause, you could find yourself stuck with:

A non-performing or misaligned management team.
Costly penalties just to regain control of your business.
A lengthy legal battle if you try to exit on your own terms.

Example – The Property Management Trap

A real estate investor hires a property management company to oversee several rental units. The firm promises higher occupancy rates and efficient maintenance handling, but within months, the investor notices serious issues—rising vacancies, maintenance delays, and tenant complaints.

When the investor tries to fire the management company, they discover the contract requires six months' notice and a $10,000 termination fee. Worse yet, the management firm has the right to continue collecting a percentage of rental income even after termination for "transition support."

How to Protect Yourself

A fair termination clause should allow both parties to exit under reasonable conditions. Before signing, ensure that you can terminate the agreement:

With Cause: If the management company fails to meet its obligations, you should be able to terminate immediately or with minimal notice.
Without Cause: If you simply want to part ways, the notice period should be fair—typically 30 to 60 days.
Without Hefty Penalties: Avoid termination fees that lock you in financially.

If the management company pushes back on reasonable termination terms, it’s a red flag. A reputable firm should have confidence in its service and not rely on legal traps to retain clients.

Mistake #3: Failure to Define Roles and Responsibilities

Ambiguity in a management agreement is a recipe for disaster. If you don’t clearly define what the management company is responsible for, you could find yourself in a frustrating situation where key tasks fall through the cracks—or worse, you end up doing the work yourself.

Why Vague Agreements Lead to Problems

Many agreements use broad, generalized language when describing responsibilities. Phrases like “handle business operations” or “manage day-to-day tasks” sound official but don’t actually clarify who does what.

This lack of clarity can lead to:

Disputes over responsibilities—You assume the manager will handle certain tasks, but they claim those duties weren’t included in the contract.
Operational inefficiencies—When no one knows exactly who’s responsible for critical business functions, mistakes and delays pile up.
Unexpected costs—You might have to hire additional staff or outsource work because the management company won’t cover the tasks you assumed they would.

Example – The Fitness Center Oversight

A gym owner hires a management company expecting full operational oversight, including staffing, payroll, and equipment maintenance. The contract simply states that the firm will “oversee gym operations and customer service.”

A few months in, the owner notices high staff turnover and delayed equipment repairs. When they confront the management company, the response is, “That’s outside our scope—our role is limited to member relations and marketing.” Now, the owner is scrambling to find new staff and manage repairs on their own, despite paying thousands in management fees.

How to Get It Right

Every critical function of the business needs to be explicitly assigned in the agreement. Break it down into specific responsibilities, including:

Staffing & HR – Who hires, trains, and pays employees?
Operations & Logistics – Who handles day-to-day business functions?
Maintenance & Upkeep – Who ensures the facility, equipment, or business assets are properly maintained?
Financial Oversight – Who manages budgets, payments, and reporting?

If it’s not clearly spelled out in writing, don’t assume it’s covered. Push for clarity before signing, not after problems arise.

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Mistake #4: Overlooking Liability and Indemnification Clauses

Signing a management agreement without carefully reviewing liability and indemnification clauses can leave you on the hook for someone else’s mistakes. If the contract unfairly shifts legal and financial responsibility onto you, you could face unexpected lawsuits, fines, or damage payments.

Why This Mistake Can Be Financially Devastating

Indemnification clauses determine who is responsible for legal claims, damages, and lawsuits related to the management company’s actions. Many agreements are heavily one-sided, stating that the business owner—not the management firm—assumes full responsibility for any legal issues that arise.

This means that even if the management company:

Negligently mishandles operations,
Violates laws or regulations,
Harms a customer or employee through poor management,

…you could be the one held legally and financially accountable.

Example – The Hotel Lawsuit Nightmare

A hotel owner hires a management firm to handle guest relations, staff hiring, and daily operations. One day, a guest slips on an unmarked wet floor, sustaining serious injuries. The hotel owner assumes the management company will take responsibility since they were in charge of the facility’s upkeep.

But after reviewing the contract, the owner finds a broad indemnification clause stating that they (not the management company) are responsible for any legal claims related to the property. As a result, the hotel owner is left paying for medical bills, legal fees, and damages—all while the management company walks away unscathed.

How to Protect Yourself

Before signing, carefully review the liability and indemnification terms. A fair agreement should:

Make the management company responsible for its own negligence or misconduct.
Ensure liability is shared appropriately based on who controls key decisions.
Exclude broad indemnification clauses that shift all risk onto you.

If the agreement doesn’t protect you from liabilities caused by the management company’s mistakes, negotiate the terms or walk away.

Mistake #5: Ignoring Performance Metrics and Accountability

A management company’s job is to improve your business—but without performance benchmarks, there’s no way to measure success. If the agreement doesn’t outline clear expectations, the management company could underperform while still collecting full pay.

Why a Lack of Metrics Leads to Poor Results

Without performance standards, you may experience:

Missed revenue targets – If there are no financial goals, the management company has no incentive to drive business growth.
Minimal effort – Some firms do the bare minimum because they’re getting paid regardless.
No leverage to replace poor managers – Without written benchmarks, you have no contractual basis to hold them accountable.

Example – The Commercial Property Vacancy Problem

A commercial property owner hires a firm to manage leasing and tenant relations. The agreement simply states the company will “maximize occupancy and maintain the property.”

Six months later, several office spaces remain vacant, tenants complain about slow maintenance response times, and revenue is down. But when the owner confronts the management company, they argue that the contract never specified exact leasing or maintenance goals. Without clear performance requirements, the owner has no legal recourse to demand better results.

How to Avoid This Mistake

A well-drafted management agreement should include measurable performance benchmarks, such as:

Revenue targets – If managing a business, set sales or profit goals.
Occupancy rates – If managing property, define minimum leasing expectations.
Service response times – If handling maintenance or customer service, include specific response deadlines.

Regular performance reviews should also be part of the contract, ensuring you can hold the management company accountable and replace them if needed.

Conclusion

A bad management agreement doesn’t just cause headaches—it can cost you thousands in lost revenue, legal disputes, and operational inefficiencies. Before signing any contract, make sure you:

Clarify the compensation structure to avoid overpaying.
Ensure you can terminate the agreement without excessive penalties.
Define all roles and responsibilities to prevent confusion.
Review liability and indemnification clauses to avoid legal pitfalls.
Include performance benchmarks to hold the management company accountable.

Taking these steps will help you protect your business, your finances, and your peace of mind. If you’re unsure about an agreement, consulting a legal expert—or using a well-structured contract template—can save you from costly mistakes.

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.