Restaurant companies with multiple units often collect management fees from the unit level to fund C-Suite management operations. The purpose of a management fee can be different for various companies. Still, the traditional purpose is to compensate a working owner or a working corporate staff for their support of the various units. If you have an operating agreement or an investor agreement, the management fees must be described clearly to all parties involved.
As of 2021, typical management fees range from one (1%) to six (6%) percent of gross sales. It’s an important distinction to calculate the fees off gross sales as opposed to net sales. Gross sales are typically defined as sales that include comps and sales tax.
Some restaurant companies estimate what their management fees should be by simply looking at the expense of the corporate group. Others use industry-standard percentages. It’s really an individual company decision as some companies that are positioning for a future event like to keep the unit level economics looking better for potential acquisitions, private equity transactions, or outright sale of the business.
We have clients across a broad spectrum of concepts that apply management fees to the unit level. I have never seen a one (1%) percent management fee in my experience. Typically, full-service restaurant companies are at the five (5%) percent level and casual dining companies are between the three (3%) and five (5%) percent level.
Many restaurant companies start applying management fees without ever defining what the unit level is getting for those fees. Since the entity applying the fees is most often majority ownership of the unit level stores, nobody thinks it is important to define what the deliverable is for the fees. I think it is important on both sides of the equation. Even if those deliverables are not outlined in an operating agreement or investor agreement, keeping a good grasp on what the unit level should be receiving for the fees is essential. It also protects the C-Suite from undercharging for fees as the needs or demands of the company change.
With the restaurant industry’s current challenges, including supply chain issues and labor shortages, most restaurant companies would be hesitant to raise their management fee percentage. I would argue that this is exactly the scenario that would require an increase. As we leave an inflationary economy (too much money/demand for too few goods/supply) and enter a recessionary economy (two consecutive quarters of economic decline based on GDP), we need to ensure that the C-Suite level support is being recognized for its value to the overall health of a restaurant company. There is no other way in the restaurant business to determine how effective upper-level management is other than just plain profit margin. If your restaurant company is currently profitable in this environment, then there is no question that you should be collecting at the higher level (6%) in management fees.
The second area to consider is whether you should be charging the unit level for services provided. If management fees are purely collected for oversight of the business on behalf of ownership, then why would companies not charge for bookkeeping, accounting, and payroll processing services provided to the unit level? These are services that a free-standing restaurant would need to pay for independently if they weren’t being provided by a corporate team. Otherwise referred to as administrative fees, these should also be based on gross sales and should fall in the range of one (1%) to three (3%) percent depending on the services provided.
It’s time to review your management fees and consider administrative fees. Corporate teams are expensive to maintain in today’s restaurant environment, and the poaching of C-Suite level positions is at an all-time high. Running your corporate team into the ground to save money at the unit level ends in a terrible place. Losing experienced high-level management today is very expensive.
Please contact us here at KROST if you have questions. We can assist you with evaluating your current status concerning either management or administrative fees.
About the Author
Jean Hagan, Principal
Jean has owned, operated, and consulted in the restaurant industry for more than 30 years. During that time, she worked with a well-known national chain; owned a food and beverage company that operated multiple restaurants, bars, and event spaces in the Squaw Valley area; and became the president, CEO, CFO, and shareholder of one of the highest-grossing restaurants in California. Today, Jean is Principal and leads the Restaurant Operations Consulting practice at KROST. » Full Bio