Revenue Share Agreement
A revenue share partnership agreement, also known as a profit-sharing agreement, is a document signed by all partners in a partnership that outlines the criteria to be followed when distributing business profits or losses. The revenue share partnership agreement may be made as part of, or as an attachment to, a partnership agreement.
A revenue share partnership agreement is a legal document between two parties where one party has to pay a percentage of profits or revenues received to the other for the rights to use something. This contract allows a company to share in the profits from a product or service that is directly linked to the company’s core business.
For example, a music producer may sign an agreement with a record company where the producer will pay 25% of all revenue received from CD sales to the record company, who has rights to the sound recordings. In this case, revenue sharing is used as a means for the record company to recoup costs on developing and promoting the artist.
The need for a revenue share partnership agreement
Partners in a business must figure out a way of sharing business profits and losses. Partners without a written agreement that sets out how they will share any profits or losses in the years to come are bound to have conflicts. Prudent businesspeople insist on having a detailed partnership profit and loss share agreement. The partners should try to anticipate every scenario and use the agreement to explain the ways in which profits and losses will be shared in such scenarios.
Revenue share partnership agreements also sharing keeps stakeholders, shareholders, and investors happy. In fact, some companies implement it to keep their employees happy by using commissions and bonuses.
Take the case of a sports league. Several sports teams use revenue sharing with the amount of revenue collected from ticket sales and merchandise. All the teams in the National Football League (NFL) pool their revenue and this amount of money is shared among all the members.
Common criteria used to share profits and losses
Federal and state laws do not dictate how losses and profits should be shared in partnership businesses. It is up to the partners to agree on the criteria for sharing revenue. Profits and losses in a revenue share partnership agreement may be shared using any of the following methods:
- Capital contribution: Businesses that use this model of profit and loss sharing distribute profits and losses depending on how much (or how little) a person contributed in terms of capital when starting the business. This model may reward people who invested more when the business was being launched.
- Management contribution: In this type of agreement, partners who have an active management role are favored when distributing profits compared to inactive partners. This kind of agreement is common in businesses that need specialty skills to run.
- Custom criteria: Some partnerships make agreements in which the share of profits or losses varies depending on factors like business performance and the amount of profit and losses. In some agreements, select partners may be entitled to shares of the business profits but not the losses.
What should be included in a revenue share partnership agreement?
Although a revenue share partnership agreement should be simple, it should include all the details needed to avoid potential conflicts. A business lawyer in your area can help you draw up a balanced partnership revenue share partnership agreement or partnership agreement. Some of the details that can be included in the agreement are:
- The partners: A good revenue share partnership agreement should mention all the parties to the agreement. The names and addresses of all the partners should be started at the top of the agreement.
- Signatures: The revenue share partnership agreement should be validated by the signatures of all the partners.
- The business name: The revenue share partnership agreement should mention the name and address of the business for which the agreement has been made.
- Bank accounts: The revenue share partnership agreement should mention the accounts where the profits and payments of the profits will be deposited.
- Sweat equity payments: Some revenue share partnership agreements explain how sweat equity payments will be handled. A managing partner may draw a salary from the business while inactive partners can’t. In this case, the partners may agree that part of the managing partner’s salary counts toward the profits and such a salary is deducted from his share of the business profits.
- Profit and loss share ratios: Revenue share partnership agreement should be clear on how profits and losses can be shared. The shares can be in the form of percentages (which should add up to 100 percent), ratios, or fractions (which should add up to one). Examples can be used to demonstrate important ideas.
- Restrictions: Revenue share partnership agreement usually restrict partners from incurring expenses without the consent of all the partners. The agreement may also prohibit any partner from giving away the using the company’s profits without getting the full backing of all the partners. Revenue share partnership agreements usually mention specific restrictions that apply to all or some of the partners. Such restrictions may include the fact that partners cannot misuse the company’s resources.
- Partnership continuity: The revenue share partnership agreement may explain what happens to a partner’s share in case she dies. Some revenue share partnership agreements pass on the partner’s share to his legal heir or give the remaining partners the first chance to buy the shares. The agreements may also touch on other issues that could happen if some of the partners wish to leave the business.
Benefits of revenue share partnership agreements
In the revenue sharing style of funding, investors fund a company and receive a percentage of that company’s revenue. This is typically in the range of two to ten percent. The returns depend on the company’s growth.
Here are some of the benefits of revenue sharing:
- Shared growth: The structure of revenue share partnership agreements allows all parties involved to share revenue. The company and all its shareholders focus solely on generating sustainable revenue.
- Less impact on the bottom line: Revenue share partnership agreements provide for revenue sharing takes a percent of the investment’s gross revenue. This implies that even if your company has a slower rate of revenue for a month, there is less impact on your bottom line.
- You remain in control: Once you meet the repay cap, you don’t have to share future revenue with your investors or shareholders. You retain full ownership and control over your company.
- Higher chance of funding: This model gives companies a higher chance of being funded since the focus is on revenue growth. The changes in potential investments are bigger.
- Provides better direction: Revenue sharing does away with equity. Investors are simply creditors instead of being owners of a business. Hence, there is a better direction, and you can focus on growth and higher profits and returns. The focus on revenue instead of acquisition makes success easier.
- Disadvantages of revenue sharing
- While advantageous, revenue sharing does have its fair share of downsides such as shifts in focus and giving rise to errors.
Here are some of the disadvantages of revenue share partnership agreements
Losing sight of longer-term goals: While the priority on revenue is key, there are chances that this will be directed towards generating it quickly. This can cause teams to lose sight of larger and longer-term goals, which is not good for business. It is not ideal for revenue generation to happen at the cost of being profitable.
Time spent on reporting and accounting: There is significant time devoted to accounting and reporting the partnerships closed deals and final prices when a revenue share is involved. If there is no efficient system in place that defines how both sides gather information, this increases the possibility of errors. This causes doubt about strains in relationships that otherwise would provide many benefits.
How revenue sharing works under revenue share partnership agreements
With the revenue sharing model, businesses keep some of the revenue it receives and splits it among their stakeholders, shareholders, and investors. Some companies may even share this with third-party sellers who sell their products or services on their behalf.
In this way, the regulator allows the operator to keep some portion of the revenues it receives (beyond a pre-specified point) from selling the product or service. The operator is required to give the rest to customers through price reductions, refunds, or increased investment in facilities or services.
How revenue sharing works
With the revenue sharing model, businesses keep some of the revenue it receives and splits it among their stakeholders, shareholders, and investors. Some companies may even share this with third-party sellers who sell their products or services on their behalf.
In this way, the regulator allows the operator to keep some portion of the revenues it receives (beyond a pre-specified point) from selling the product or service. The operator is required to give the rest to customers through price reductions, refunds, or increased investment in facilities or services.
Concepts of revenue sharing revenue share partnership agreements
There are different, but closely-related concepts of revenue sharing that are essential to know. Total revenue sharing and a revenue sharing business model are two important concepts of revenue sharing.
- Total revenue share
Total revenue share measures the profitability of a product under the revenue share partnership agreement. This takes marketing and manufacturing costs into account. Total revenue share is calculated by the ratio of the costs required to fulfill an order.
Company reports mention total revenue share, and it represents the direct costs related to revenue. This includes raw materials, gas, and labor. What remains is known as gross margin, which is the total income after the cost of production gets deducted. Total revenue share is always expressed in percent form.
- Revenue share business model under revenue share partnership agreement
In a revenue sharing business model, a company shares additional profits with its business partners. A partner gets revenue from a stakeholder in a company. For example, within the iOS ecosystem, when a third-party developer makes applications for the App Store, they need to share a specified cut with Apple. This applies whether the developer generates revenue from both app and in-app purchases.
A revenue share partnership agreement is a legal document created for two parties. Under this agreement, one party has to share a percentage of profits from revenue with the other. For example, say, a music artist signs with a record label. Since the label has rights to the tracks, they would have to pay the label 10% of all revenue the artist gets from music sales. The company uses revenue sharing to recover its costs on production and promotion.
Some of the common sections under a revenue share partnership agreement include:
- Representation information
- Governing laws
- Arbitration
- Amendment
- Revenue share partnership agreement.
Benefits of revenue sharing
In the revenue sharing style of funding, investors fund a company and receive a percentage of that company’s revenue. This is typically in the range of two to ten percent. The returns depend on the company’s growth.
Here are some of the benefits of revenue sharing:
- Shared growth: The structure of revenue sharing allows all parties involved to share revenue. The company and all its shareholders focus solely on generating sustainable revenue.
- Less impact on the bottom line: Revenue sharing takes a percent of the investment’s gross revenue. This implies that even if your company has a slower rate of revenue for a month, there is less impact on your bottom line.
- You remain in control: Once you meet the repay cap, you don’t have to share future revenue with your investors or shareholders. You retain full ownership and control over your company.
- Higher chance of funding: This model gives companies a higher chance of being funded since the focus is on revenue growth. The changes in potential investments are bigger.
- Provides better direction: Revenue sharing does away with equity. Investors are simply creditors instead of being owners of a business. Hence, there is a better direction, and you can focus on growth and higher profits and returns. The focus on revenue instead of acquisition makes success easier.
References
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