What Is a Revenue Share Agreement?
Revenue share agreements are legally binding contracts that determine how revenues earned from the sale of products or services between two or more parties are divided amongst themselves. These agreements are common in a variety of business arrangements that involve multiple stakeholders in the business. For instance, revenue shares may be used between an provider and distributor or software developer and reseller, but they can also represent the income distribution among partners in a law firm, co-owners of a business, profit-sharing provisions between companies, etc.
While there are many potential applications for a revenue share agreement, the vast majority fall into the following common categories of business relationships: Even though revenue share agreements are commonly used in these contexts, it is important to note that they are not limited to them . In fact, these contracts can be used in virtually any situation involving the collection of revenue by multiple parties.
In many cases, lump-sum revenue sharing payouts can be difficult to manage. Particularly when profits are large, many parties may have a hard time agreeing on how to divide a substantial amount of money. Overlooked expenses can lead to parties feeling slighted or disgruntled. For that reason, many companies and organizations utilize revenue sharing agreements to ensure the division of earnings in a clear and transparent manner.
A strong revenue share agreement can benefit both or all parties involved in that it addresses many critical aspects of the business relationship, including: The specifics of each contract will vary substantially, depending on the unique requirements and expectations of the parties involved.
Critical Components of a Revenue Share Agreement Template
For a revenue share agreement template to serve its purpose, it must include all the critical details. As the name suggests, such a document includes a section on how much of the revenue generated from a certain product or service is going to be distributed among the parties involved. However, leaving out an important detail can cause some conflict. Therefore, it’s vital that any revenue share framework you’re using contains the following elements:
Parties Involved
It should outline exactly who is involved with the revenue sharing agreement. Moreover, it must specify all the parties. This means that if your business is partnered with another company to sell a product, and you’ve both agreed that you’re going to share the revenue, then the template has to include the names of both parties before you sign it. They must be clearly defined so there is no confusion down the road about who is being included for a share of the revenue.
Percentage Shares
Even if a revenue share framework includes the other details, it’s useless without including how the revenue is going to be shared. The document must state how much of a percentage each party is going to get from the revenue generated by the sale of whatever they were working on together. If you’re operating under different terms, you should create a separate agreement with another template. But if you’re doing the exact same thing with different parties, you should still create a new revenue share framework so everything is clear.
Payment Schedule
After specifying the percentage share agreement, the next most important factor to include in the document is the payment schedule. After the revenue is generated and the funds are received, how often is the revenue going to be distributed? Some parties will agree to make the distribution on a monthly basis; others prefer a quarterly or yearly schedule.
Termination Clause
Lastly, the revenue share agreement must contain a termination clause. Both parties need to know what is going to happen if one of them decides to go its separate way. As the terms are laid out in your document, you should be able to clearly state what steps you need to take to terminate the agreement.
Advantages of Using a Revenue Share Agreement
Both parties stand to benefit when a revenue share agreement is properly implemented. For example, its use will help guard against the burden that might be associated with the revenue division process. In addition, both parties will have a mechanism to better align their interests through its implementation. Since the contract works on a contingent basis, both parties to the contract have incentive to work towards a common goal. It can also aid in risk mitigation by eliminating some of the uncertainty inherent when a host company is deciding how to fairly split revenues with its in-house expert.
One of the greatest advantages of the contract is that it incentivizes the consultant to help the host company generate revenue.
Revenue Share Agreement Templates: Common Mistakes
There are various pitfalls to be aware of when entering into a revenue share agreement. Many of them involve a breakdown in communication and trust between the parties. Some common pitfalls include: Without a clear understanding of the scope and purpose of the agreement, it is all too easy for parties to deviate from the initial intention behind the agreement and enter into negotiations over the terms of individual projects without ever returning to the agreement itself. Unfortunately, when arguments arise and parties feel that the agreement does not provide protection or does not provide answers, they oftentimes have the advantage of having not only an agreement but the ability to negotiate a unique agreement for each project or separate venture. This can be a significant disadvantage for the other party. Oftentimes when revenues are involved , a group of independent contractors enter into an agreement based upon the expectation that they will receive payment over time, based upon the amount of revenue generated by selling a new product or a completed service. However, it is not always necessary to fund the entire project, and in some cases, such funding was not intended. If the project is not successful, how the revenues are distributed can be a point of contention. How disputes are handled is extremely important due to the length of the agreements’ duration and the potential for disagreements to arise. Without a clear procedure for how disputes will be handled, the parties may find themselves in litigation, which can be costly and uncertain. Any good agreement must set out clear procedures for what happens in the event of a dispute, as well as how and when profits can be used to finance the project.
Customizing a Revenue Share Agreement Template
Customizing a revenue share agreement template to fit your specific needs is essential for a successful partnership. Regardless of the industry or the scope of the collaboration, the agreement must outline clear terms that address the nuances of the business arrangement. The industry in which your company operates will have a significant impact on how you approach the creation of a revenue share agreement. For example, businesses in the tech industry often utilize revenue share agreements as part of an affiliate marketing program designed to generate a sales pipeline. The lead generating activity must be compensated, and a percentage of the sales revenue will be awarded to the affiliate for participating in the program. In this case, your revenue share agreement must clearly describe the program, explain what is expected of both parties, and tie compensation to specific metrics related to performance. Properly tailored, your revenue share agreement will cover the details of the partnership and provide protection should the program need to be modified or terminated. You must also consider your company size when customizing your revenue share agreement. Large corporations often engage in global partnerships and must adhere to strict regulations pertaining to distribution and collaboration. In these types of scenarios, revenue share agreements are more complex and require legal assistance to create and implement. Once in place, your revenue share agreement will help your business navigate changes, such as introduction of new products, personnel changes, or departure of one of the partners. An agreement that is tailored to address the unique components of your business will create a more transparent relationship that is capable of withstanding and weathering challenges. While the basics of creating an equitable revenue sharing agreement are consistent, the process must take into account the industry in which the business operates and the size and scope of the collaboration. By understanding your business and its partners, you’ll be able to create a revenue share agreement that helps ensure business is profitable for both parties.
Considerations for Revenue Share Agreements
Before entering into a revenue share agreement, it is important to consider relevant legal requirements. Revenue share agreements contain financial obligations, and as a result, must comply with relevant legislation, including the rules and requirements governing registration of contracts for any commissions, fees or other types of remuneration. A party may be required to register a revenue share agreement with the relevant business or commercial authority, depending on the jurisdiction. Failing to observe a mandatory requirement may render the agreement unenforceable. For example, many jurisdictions have strict laws which govern franchises. A franchise is an arrangement (regardless of its form) in which the owner of a trademark, business name, advertising symbol or other thing identifies its goods and/or services with that name or symbol reserves to the franchisee a significant measure of control over the marketing of goods and/or services under that trademark, business name, advertising symbol or other thing . In this situation, a revenue share agreement may constitute a franchise, and failing to register the franchise agreement with a regulatory authority may result in enforcement action being initiated against one of the parties. A revenue share agreement may also be used to disguise what may otherwise be a joint venture. Joint ventures can include simple collaborative work arrangements to complex multi-party corporate structures. Joint ventures can take various forms and may be carried out through a separate legal entity, partnership, limited partnership, deed of collaboration, unincorporated association, or a contract. Entering into a revenue share agreement which is in fact a joint venture can have significant tax and corporate law implications, including taxation on income and potentially double taxation on dividends paid by a corporate joint venturer. It is advised to seek independent legal advice for the tax and reform implications of a revenue share agreement before entering into a revenue share agreement that is in fact a joint venture.
