What is a Profit Share Agreement?
A profit share agreement is a legally binding document setting out the terms of a profit sharing arrangement, where two businesses work together and decide to split the profits of their product. These kinds of agreements are used when two entities work jointly towards the same strategic objectives. The contract will detail the precise details of how the profits will be divided amongst the parties. Profit share agreements are essential in order to protect the interests of your business during a joint business venture.
Who Should Use It?
A profit share agreement is strongly recommended for businesses who are working together with another business to achieve certain goals. They are most suited to circumstances where each party brings a different part of the product or service to the table.
A profit share agreement is useful as it defines important aspects of profit sharing, yet enables the businesses to remain as separate entities despite working together and sharing profits.
Take the relationship between an online retailer and a clothing brand, for example. If clothing company AN Apparel entered into an agreement to sell their summer line through an online retailer ICON, there would be a need for the parties to enter into a profit share agreement. The agreement will split the profits between AN and ICON. As AN creates the product they will receive 80% of the profit, while ICON will receive 20% for marketing and selling the product. In such an example an agreement is needed to minimise the possibility of legal and commercial risks. The agreement will set out strict terms that protect both parties, while also governing their actions. Once AN Apparel and ICON have come up with terms, they will take their plan to a lawyer who will help them draft and complete a formal profit share agreement.
How Is It Used?
Ordinarily it is the parties who negotiate the arrangements of their agreement. In order for it to work effectively, each party must understand their roles, rights and obligations under the agreement. Parties must be aware of how profits will be distributed. Following a mutual agreement by the parties, it is beneficial to have the contract formally drafted by a lawyer and signed by each party to the contract. This process helps ensure all parties are on the same page regarding the terms of the agreement, hence reducing the possibility of legal and commercial risks.
What Does A Profit Share Agreement Include?
- The way in which profits are portioned between parties
- The roles and responsibilities of each party during the agreement
- The profit share agreement will include terms stipulating the ownership of intellectual property created prior to commencement, and during the course of the agreement
- The timeframe of the agreement
- Dispute resolution processes
- How liability is shared between parties in the case of loss
- How and when the agreement can be terminated if a party wishes to discontinue the partnership