How do Profit Share Agreements work?
A profit share agreement is a legally binding contract which governs how two parties are to distribute profit and losses. Profit share agreements govern the relationship between two businesses who are working together to achieve a specific business goal. Two parties will use a this agreement to legally define the terms of their short-term or long-term partnership.
It is vital for protecting your businesses interests during a combined project or joint business venture.
When profit share agreements are needed
Profit share agreements typically arise when two businesses plan on sharing profits from a combined effort on a product or service.
An example of this would include a relationship between a clothing brand and an online retailer. Hence, if Oceans Apart Apparel the clothing brand entered into an agreement to sell their t-shirts through an online retailer called The ICON. There is a need for Oceans Apart Apparel to enter into a profit share agreement with The ICON. In these situations there is both a commercial and legal need for having a profit share agreement in place. As both businesses will be sharing in the profit each time a sale occurs. This relationship needs to have strict terms that govern and protect both sides.
Therefore, a profit share agreement is a good way as well to define the relationship and the roles both businesses have. This can be as simple as defining the start and end date of the project, or assigning terms and expectations that need to be met throughout the duration of your project. Also it allows business to fairly share the profit, especially if one business is adding more value than the other.
What profit share agreements contain
A profit share agreement typically contains the following points as legally binding clauses:
- How profits need to be shared between the parties
- The start and end date of the proposed business partnership or combined project
- If you create a new product/service for your business a profit share agreement will dictate the IP rights to the product or service
- The roles and responsibility of each party during the course of the agreement
- It should outline how liability is going to be shared between the parties
- How the agreement should be terminated if one party wishes to exit and move on
- Dispute resolution process on how to resolve disputes if they arise during the course of the agreement
- If the partnership fails the profit share agreement should outline how losses will shared
Keep in mind, the terms of your agreement should always be clearly negotiated between each party. It is important to have this set out clearly from the get go in order to avoid the possibility of business disputes. When you take on a profit share agreement or any legal agreement you are taking on some commercial risk.
That is why it is always recommended to have a lawyer look over your profit share agreement or draft up the necessary terms. Without doing so you open your business up to commercial and legal implications.
To sum up
- A profit share agreement is a good way to protect your business when going into a partnership with another
- It sets clear terms for both sides and is a legally binding agreement
- It can dictate more than just how profits are suppose to be shared
If you need any help drafting our reviewing a profit share agreement you can get in touch with our commercial lawyers or call us on 1300 337 998.