What Is a Revenue Sharing Agreement?
The purpose of a revenue sharing agreement is to establish an early understanding between parties as to the terms under which sharing of revenue may occur in the future. To this end, the agreement outline the general terms under which the parties foresee sharing revenue as well as the allocation of any resulting business expenses and liabilities. A revenue sharing agreement may contain such features as the following: Revenue sharing agreements are commonly used by licensors of intellectual property, software developers, online content providers and retailers, franchisors and advertisers . Such agreements are also beneficial to independent agents and brokers that sell insurance or annuities or assist in other financial matters. The purpose of the agreement is to allow the parties to enter into a distributor or licensing arrangement to share revenue rather than certifying that a legal partnership exists between the parties. The saving grace of a revenue sharing agreement is that although the parties are not forming a legal partnership, the terms of the agreement can dictate the allocation of liability as between the parties and may limit liability among the parties.
Advantages of a Revenue Sharing Agreement Template
Using a template to draft a revenue sharing agreement brings with it a number of advantages. For instance, investors are often looking for an agreement that has been used successfully by other businesses, and a pre-prepared template provides this assurance. A standardized template can also help save time, as you will not have to start from scratch when creating an agreement. Additional benefits include the provision of many clauses that you can add to the agreement in order to make it more comprehensive and effective, and ensuring legal compliance by including certain provisions that must be present in order for the agreement to be valid, such as those pertaining to a partner’s personal liability.
A standardized template also provides the advantage of consistency in terms. Rather than having to come up with or research commonly used terms and conditions for various revenue sharing agreements, you can simply customize an appropriate template to your needs. Moreover, it is easier to compare agreements and avoid misunderstandings when you are using a template that has commonly used and clear terms that are easy to read and understand. Overall, a royalty calculator template or a commission calculator often provides you with the right foundation for getting started with drafting a standard revenue sharing agreement.
Notable Clauses in a Revenue Sharing Agreement
Payment Terms: Compensation to the consultants or managers should be clearly spelled out in the Compensation Schedule. Some parties may agree to defer all or a portion of their compensation (usually from the various revenue sources that the agreement covers) until certain "milestones" in the company’s business are achieved. Be cautious if one party is deferring its compensation, as this is more likely to be an indication that the company is low on resources. Regardless, a representative from each party should periodically review the accounts payables and receivables of the other party as well as a third party custodian, if any, to confirm that all payments have been received on a timely basis. Failure to pay managers or consultants on time is sometimes a telltale sign of financial trouble.
Distribution of Revenue: If an offering generates multiple revenue sources for the company and the manager/consultant is entitled to some or all of those sources, then the agreement should clearly state how the revenue will be distributed (i.e., what bills and direct expenses are to be paid) and how the company will determine the net revenue upon which the manager/consultant’s percentage of the revenue will be calculated. These payment terms are usually contained in a Compensation Schedule that is incorporated into the agreement.
Responsibilities: In addition to the responsibilities set forth in the executive employment agreements of the company’s employees, the agreement should clearly delineate the responsibilities of the manager/consultant, such as the specific tasks to be performed and any services to be rendered. It should also set out the authority of the manager/consultant relative to the company.
Dispute Resolution: The parties to an agreement need to agree on how they are going to handle any disputes that arise under the contract. Some agreements provide for mandatory, binding arbitration at a designated arbitration service (such as the American Arbitration Association). Certain classes of disputes may be excluded by agreement (such as internal disputes that may be better handled in court).
How to Tailor Your Template
When it comes to customizing your revenue sharing agreement, the key is to ensure that the modifications you make align with the specific business relationship and the desired outcomes. To do this, you should begin by carefully reading through the template. Familiarize yourself with each section and clause, and note areas where the terms from the template may not fit perfectly with your circumstances.
Next, identify which sections require modification. Common areas that may need to be customized include profit-splitting percentages, the distribution of resources, and the specifics around payment scheduling. In some cases, sections may need to be added or removed entirely. For example, if your agreement does not address intellectual property ownership, it is worth including a clause that does so.
After determining the necessary changes, you will want to redraft the sections or clauses in question. This is where you can ensure that the language of the agreement clearly and accurately reflects the intentions and conditions of the parties involved. You should then once again review the document in its entirety to ensure that it makes sense given all of the changes you’ve made.
Lastly, once you feel confident that the modifications you’ve made result in a clear, understandable document that accurately reflects the terms of the business relationship, you should have the new revenue sharing agreement reviewed by an attorney with experience in licensing and distribution agreements. They may have suggestions for other modifications, and they will also be able to spot any potentially problematic language. Having your agreement approved by an attorney also provides an extra level of protection for your business by ensuring that all parties have a clear understanding of their rights and responsibilities.
Sample Scenarios and Case Studies
According to findings, it was found that 55 out of 100 executives had found ways to successfully collaborate with third-party agencies. Of the executives surveyed, only 22% of them were for or against the use of this system but everyone involved were adaptable to the idea.
One scenario often used is that of a successful long-standing bookkeeping department within a large company. This company has excellent links with local businesses and has a high retention rate with existing clients. They are trading at around £1.5 million per year.
With this in mind, they have decided to join forces with another local business offering similar products and services , each sharing 40% of the gross profit from the trade. Together they plan to sell product/service packages to local businesses to compete within a niche market.
In this case, incorporating a jointly owned company or escrow account may be a wise move without making any one party the scapegoat when something goes wrong.
Similarly, many publishing companies run by two owners share profits and losses evenly amongst each member. This arrangement has been extremely effective in keeping wage costs low, and builds trust and teamwork amongst employees.
To encourage strong leadership potential, each owner is eligible for a special bonus depending on improved profits earned by the company during the year. Duties are focused around their unique strengths, which results in a more efficient company overall.
Legal Advice and Best Practices
Understanding the legal implications and abiding by best practices within revenue sharing agreements is vital to ensure compliance with applicable laws and to avoid potential pitfalls. Due to jurisdictional complexities, the rules that govern these agreements will vary depending upon the countries involved, the nature of the goods or services provided, and the manner in which the revenue is shared. Due to these complexities and the varying geographic areas in which the revenue sharing agreement may have effect, companies should seek to draft an agreement that conforms to the agreement’s expected governing law. A number of legal issues should be considered when drafting a revenue sharing agreement, including legal issues regarding third party rights, competition law, and tax implications. The following are some of the most common legal issues that may arise within a revenue sharing agreement.
When revenues generated by a revenue sharing agreement are not shared equitably among all parties, a third party may have a right of action against one or all of the parties to the agreement, especially if the third party can prove exclusion from the sharing of revenues. In many jurisdictions, such as Canada, third party rights between contracting parties will apply unless they are expressly excluded within the contract. In Canada, section 3(1) of the Contracts (Rights of Third Parties) Act 2000 (UK) ("the Act") states that a third party can enforce the terms of a contract which expressly confer a benefit on it or a benefit in which the parties intend the third party to benefit. That being said, the applicability of the Act may be restricted through mutual or express agreement between the parties that excludes it. The right of action of the third party may also be limited to an agreed sum of money, or to particular benefits, and it may be nullified in part or in whole.
Competitor collaboration clauses are common in revenue sharing agreements and can range from sharing data in common software systems to sharing confidential information on a product or service prior to its launch. However, any competitor collaboration clause must be carefully considered under competition law with regard to the jurisdiction to which the revenues will be shared, as different jurisdictions have different competition laws and enforcement regimes. The United Kingdom provisions of the Competition Act 1998 ("CA98"), for example, contain a Vertical Agreements Block Exemption ("VABE"). The VABE is designed to streamline compliance with competition law where agreements are between suppliers and resellers and do not confer significant market strength. As revenue sharing agreements are often between market players in which one may be the supplier, and the other the reseller, the VABE may apply, so long as the agreement does not confer significant market strength on the reseller or supplier.
The failure to understand tax implications that arise from a revenue sharing agreement can create a significant liability for the parties if not managed properly. Where revenues are shared across international borders, the implication of domestic laws and international treaties must be understood, as both can impact the liabilities of the parties. Canada has a number of double tax treaties which may change the tax treatment of revenue sharing agreements, which can be reviewed at the Canada Revenue Agency website. Where there is no double tax treaty, a withholding tax may apply on royalties, rent and management fees, which can end up being charged to the parties when the revenue is paid. Generally, due to this risk, revenue sharing agreements should contain provisions that explicitly provide for tax indemnities or withholdings.
In addition to understanding the laws governing third parties, competition, and taxation, companies may find it useful to implement simple tips to avoid common pitfalls. These include:
Companies entering into revenue sharing agreements should seek legal advice or at least attempt to familiarize themselves with the laws and regulations governing the agreement so that their rights and obligations under the agreement are protected and respected. While good drafting practice should be employed, the foregoing issues will inevitably arise in most revenue sharing agreements.
Common Questions
What is the legal status of a revenue sharing agreement? Our revenue sharing agreement is a private document between you and your CBC—therefore, it is not accessible to the general public. However, it must comply with federal and state laws and regulations as well as the policies of the Department of Health and Human Services (HHS) as outlined in 42 CFR 438.60.
Will a revenue sharing agreement be used to determine profit-sharing between partners? No, a revenue sharing agreement is exclusively used to reconcile the sharing of revenue obtained from alternative sources such as grants, donations, volunteer labor, or any other type of income not received through the CBC’s contract that is used to pay expenses. On the other hand, profit-sharing is a separate matter governed by the partnership’s governing documents .
How do revenue sharing agreements impact taxes? In some circumstances, unspent funds in the revenue sharing accounts of participating CBCs will not impact reserve margin adequacy. It is possible that the funds may not be carried over into the next tax year, which could impact an organization’s tax liability.
Should we review our revenue sharing agreement regularly? The terms of revenue sharing agreement should be reviewed at least once a year during a normal CBC audit to ensure compliance and to make necessary updates as needed based on your circumstances.
What happens if one of the partners does not adhere to the revenue sharing agreement? Based on the terms of the revenue sharing agreement, CBC partners may allow revenue sharing arrangements to proceed during the contract year so long as the funds do not impact reserve margin adequacy. At the conclusion of the contract year, any revenue sharing arrangements may need to be updated, including correct adjustments for disallowed funds.
