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James has often thought of how Michael Jordan gets a royalty every time someone, somewhere, buys a pair of his Nike sneakers. Similarly, songwriters, copywriters, even salespeople can get paid a percentage, over and over again, off their efforts.
James’s own grandfather worked as a timber broker on commission, and young James with him.
Royalty deals, or revenue share deals, have become an important part of James’s income stream, and something he discusses in this solo podcast episode.
He’ll cover the basics of rev share deals – what they are, and how they’re done.
He’ll talk about the legal aspect of revenue sharing, including the business partner agreement and the exit clause.
And he’ll explore partner selection and rev share as compared to affiliate marketing income.
On a quick note, this episode is brought to you by one of James’s rev share partners, Kleq.com, a platform integral to his website and membership management. It hosts his site, generates landing pages, integrates deeply with James’s email system, and lets James’s mentoring clients access him via an app – a powerful tool.
Table of contents:
1. Understanding revenue share deals
2. Getting started with revenue share deals
3. Deep dive into revenue share dynamics
4. Building Your Revenue Share Strategy
5. Selecting the right partners
6. Legal and financial considerations
7. Maintaining and growing your deals
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A. Communication cadence
B. Quick wins and long-term maintenance
C. Regular reporting and adjustments
Understanding revenue share deals
Definitions are always a good way to introduce a concept.
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1. What are revenue share deals?
Revenue share deals, James explains, are a paid-for-performance model where one earns a percentage of a business or product line by assisting that business. If that interests you, consider how you might apply a similar concepts to your current situation.
2. How do they work?
Revenue share deals are an alternative to traditional payment models like retainers or one-time fees, where participants earn a percentage of sales; no sale, no payment. This setup often involves strategic alliances or joint ventures with a royalty-based compensation mechanism.
James likes to refer to his partnerships as royalty agreements, distinguishing them from profit shares and stressing the unique structuring of such deals to suit his business operations. While he is not an expert in all deal structures, he prefers the royalty model for its alignment with his practices.
3. Benefits of revenue share deals
A key advantage of royalty deals is their simplicity, as they can often be established with just a pen and paper, though James advises against relying solely on a handshake.
The primary downside is the potential for wasted effort and resources if the team-up does not improve business performance.
James highlights the significant upside potential of these deals, particularly when compared to fixed retainers. By fostering deeper, long-term relationships, he can help businesses grow through various means, such as featuring them on his podcast, sharing their social media posts, or connecting them with influential contacts, thereby earning more than he would through standard mentorship arrangements or a fixed retainer.
Getting started with revenue share deals
If you’re new to rev share deals, this episode offers a basic overview of the groundwork. For a more in-depth treatment, James is ready in his Mentor program (JamesSchramko.com) to look at your deals, put together basic contract elements, assess the good and bad, and steer you clear of potential losses.
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1. Finding revenue share opportunities
Service providers or experts likely have existing clients who could potentially be revenue share partners. James suggests considering whether some clients might be more profitable on a performance basis rather than a retainer. Clients who have significantly succeeded might present an opportunity for a revenue share deal, allowing service providers to scale with the client and share in their success.
Another strategy James mentions for finding rev share opportunities involves creating a system to attract potential partners, such as attending mastermind events or setting up a dedicated lead capture page. Richard Koch and Perry Marshall, in fact, successfully used this approach to establish qualifying criteria and attract partners for joint business ventures.
2. Setting up your first deal
James stresses the importance of careful selection and written agreements when setting up your first revenue share deal. It’s a must to clearly define all terms and understand both parties’ exit strategies from the onset. For managing ongoing deals, James prefers integrating partners into his Mentor program, providing them with consistent resources and support while also offering additional private consultations and distribution opportunities.
3. Managing ongoing deals
Maintenance of revenue share deals, says James, is a straightforward process involving assistance on the fulfillment side and a monthly invoicing cycle based on performance reports. With over eight years of experience and approximately 15 personal deals, of which eight are ongoing, James has extensive firsthand knowledge of the potential successes and pitfalls of such agreements, and he has also guided his students in setting up numerous similar deals.
Deep dive into revenue share dynamics
In terms of royalty deal dynamics, one must navigate certain challenges and risks as well as recognize and leverage the benefits.
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1. Challenges and risks
With revenue share deals, says James, the greatest danger is entering a misaligned agreement. When expectations differ between parties, this can lead to failure to get paid. There are also the pitfalls of 50:50 partnerships, particularly in the early stages of online businesses, where unequal contributions and reluctance to fully commit to entrepreneurial responsibilities often result in failure.
Disputes between partners can severely jeopardize business operations. One of James’s own clients had such difficulties with a 50:50 partner, leading to a falling out. With James’s guidance in mediating and navigating towards a buyout, the client was able to resolve the situation and subsequently achieved significant financial success, generating about a million dollars a month in revenue.
Differing responsibilities and life paces can also lead to dissolution of a rev share partnership.
2. More advantages of revenue sharing
James appreciates the simplicity and low risk of exiting revenue share deals. Most of his contracts, he says, have a 30-day exit clause that allows either party to terminate the agreement with minimal complication. He likens exiting these deals to selling a business, a much more straightforward thing compared to more complex business engagements like buying equity or taking on corporate roles.
James values, too, the flexibility and potential income from these arrangements. His own revenue share deals have proven more profitable and stable than early 50:50 partnerships. Over time, he has learned to optimize these deals, which now significantly contribute to his income and even surpass earnings from a large membership base, showing the effectiveness of carefully selected and managed royalty arrangements.
Building Your Revenue Share Strategy
Several factors can significantly impact your rev share strategy and its effectiveness: Having a following and authority, good connections, and effective distribution channels.
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1. Positioning and authority
Having a strong personal brand and reputation for success is important, says James, in revenue share deals. This consideration partly prompted his own rebranding to a personal brand as a strategic move.
Known for his expertise in managing teams, strategic planning, and understanding both the marketing and operational aspects of a business, Schramko brings a valuable general manager perspective to his partnerships. His extensive experience and exposure to various business scenarios enhance his ability to support his partners effectively, letting them concentrate on their specific roles while he handles broader management tasks.
2. Importance of connections
Maintaining strong relationships and a good reputation is crucial in the context of revenue share deals. James believes that ending deals on amicable terms and avoiding the churn-and-burn approach are key to long-term success. He likens his role to that of traditional PR companies before the digital age, who managed a portfolio of clients and facilitated interactions and opportunities among them. This approach not only enhances his partnerships but also adds value by connecting his partners with new opportunities and potential collaborations, like the cross-pollination strategy once prevalent in PR.
3. Effective distribution channels
Media platforms, such as podcasts or YouTube channels, facilitate revenue share deals by providing effective distribution channels. James is actively expanding his YouTube presence into new markets, anticipating that this will open up opportunities for monetization through performance pay, where he can leverage his platforms to spotlight and support others.
Selecting the right partners
When it comes to partner selection, good selection criteria is key, and this will grow and develop as you do more deals.
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1. Criteria for choosing partners
Among James’s early mistakes with rev share was partnering with solopreneurs lacking a support team, making it difficult to implement great ideas. He also encountered obstacles in markets where he lacked distribution channels, limiting his contribution to advisory roles only.
Successful partnerships, however, like James’s team-up with Charley Valher of Valher Media, demonstrate the potential for high performance when his partner offers a product or service that is in demand among his clients. This allows for straightforward promotion through his podcast, social sharing, and personal introductions.
2. Red flags and warning signs
Preliminary testing is important before entering into strategic revenue share deals. James uses affiliate promotions as a way to gauge client interest and reliability of payment. He considers it a red flag if affiliate commissions are delayed or if client purchases are not sustained over time, as these issues indicate potential problems in a more committed partnership where his earnings are based on performance.
James has mostly had long-term collaborations, with partners typically happy to fulfill their payment obligations. These are contractually set between five and 20% of revenue.
The financial dynamics, says James, are favorable for both parties, and when, in some cases, partnerships have concluded with a buyout, it has allowed him to receive multiples of his royalty without further obligations. This exit strategy, coupled with careful partner selection, has contributed to his long-standing and profitable relationships.
Legal and financial considerations
In terms of legal and financial considerations, the contractual agreements are a must have.
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1. Contractual agreements
James stresses the need to have formal contracts in writing before entering into any agreements. As a former debt collector, this is important to him. He also advises considering the legal jurisdiction and assessing the risk of non-payment, underscoring the importance of understanding the contractual mechanisms involved.
2. Tax implications
There will be tax implications and auditing options involved in revenue share deals, and they will be different based on geographic location. When both parties are in Australia, GST applies, but for international partners, the income is considered export and exempt from GST.
Important too, says James, is understanding how revenue is calculated, whether, for instance, it includes merchant fees. And the figures, he says, should represent net revenue, accounting for any refunds. These nuances are critical to ensure accurate and fair financial dealings.
3. Buyout clauses
Buyout clauses are hugely beneficial in revenue share deals, says James. They can prevent resentment from partners over ongoing payments, especially when these payments become substantial. In his podcast discussion with Jay Abraham, the business legend regretted not using them earlier.
Abraham also memorably reflected that opting for performance-based deals earlier could have significantly increased his earnings from long-term client engagements.
James suggests setting realistic and sustainable royalty amounts to avoid risking the longevity of the deal. He also recommends consulting with legal professionals to ensure the agreement is solid, especially when dealing in different jurisdictions. James recalls seeking advice from multiple experts and a lawyer to draft a straightforward yet legally robust contract, underscoring the value of professional guidance in creating effective revenue share agreements.
Maintaining and Growing Your Deals
Maintaining and growing royalty deals is really about setting a communication cadence, balancing quick wins with long-term maintenance, and having regular reporting and adjustments.
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1. Communication cadence
Maintaining close, regular communication with partners is crucial, says James, particularly when a lot of your income stems from a few key relationships. Revenue share deals involve deep, long-term connections that extend beyond business discussions, and James notes this model may not be suitable if you prefer short-term engagements with clients. A retainer model may be preferable.
2. Quick wins and long-term maintenance
Managing business partnerships is a blend of quick wins and long-term strategies. James recommends launching partnerships with immediate promotions to gain momentum, and continuously supporting them with podcasts, emails, and social shares.
Business partnerships, says James, alleviate the loneliness of entrepreneurship. And there are other collaborative benefits, such as sharing valuable insights and innovations through a dedicated channel with his partners.
3. Regular reporting and adjustments
For James, the handling of regular reporting and invoicing for revenue share deals is managed smoothly by a member of his team. This lets him to stay hands-off from the accounting aspects, which he does not enjoy. This system has functioned effectively for eight years.
Occasionally, there are minor errors in reporting that need correction, such as miscalculations of percentages or sales discrepancies, but these are rare and resolved based on honesty.
It’s not unusual for partnership terms to be recalibrated in response to significant changes in a partner’s business structure or market focus. James stresses the importance of flexibility in deal terms to adapt to changing circumstances: ”Keep your deals fluid to keep them alive.” Imbalances, if left unchecked, can jeopardize long-term partnerships.
Beyond the Basics
A few more points of discussion fall outside the basics of revenue share deals.
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1. Comparing with affiliate marketing
James says his approach to revenue share deals is similar to an affiliate relationship but on a broader scale, encompassing the entire business rather than just specific products. He differentiates this by initially testing relationships through traditional affiliate methods, then enhancing the partnership by supporting and promoting the business’s entire affiliate network, rather than competing with them.
James actually will include his partner’s affiliates on his podcast and promote them to his clients, benefiting the overall business and earning a share from the collective efforts. This strategy promotes an abundance mindset, creating a win-win situation by supporting and growing all partners involved, thus boosting overall exposure and revenue potential for the business.
2. Diversifying your portfolio
James recommends strategically enhancing your business portfolio by mapping out and understanding the products and services your clients regularly purchase. Then position yourself as a central referral point, effectively creating a ‘tollway’ to these suppliers. He suggests starting with affiliate recommendations to potentially boost income by 20% to 30% immediately.
This approach involves formalizing relationships with suppliers of high-demand services like software, traffic agency services, YouTube coaching, and SEO, among others. Careful partner selection is key to avoid conflicts and protect the business lanes of existing partners. This not only streamlines the process for clients but also allows for the possibility of expanding your role beyond mere referrals to actively helping partners grow their businesses.
3. Reverse revenue share deals
There is also the concept of reverse revenue share deals, where instead of receiving a percentage, James pays an expert to develop a business asset. During the pandemic, he implemented this model by partnering with an expert to grow a domain he owned; he provided the backend support while the expert became the face of the project and handled sales. The expert received a significantly higher percentage than typical deals due to their substantial role in the operation.
James structured the deal by allocating one-third of the revenue to the expert, one-third to his own management and coordination, and the remaining third to cover operational costs. This proved effective and is recommended for those who possess business acumen but prefer not to be the frontline expert.
Recap of key points
James acknowledges that revenue share deals are not for everyone, but are particularly advantageous for those seeking long-term relationships, and are well-suited to experts and those who typically sell retainers. He stresses the importance of choosing the right deals and formalizing them to ensure their success, advocating for sustained effort in maintaining these partnerships.
Listeners interested in exploring revenue share deals might consider joining James’s mentorship program, where he helps build and manage portfolios, a strategy that has significantly enhanced his income.
Feedback, inquiries and topic suggestions are also welcome – simply reply to one of James’s emails.
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Hi James, great podcast. How do you decide the buyout figure if they want to cancel the rev share deal. Any rule of thumb guideline you might have would be great! :)
It’s up to you. A guide might be: 24 x the monthly royalty. (Take an average of the last six months’ payments.)
Awesome, thank you! 12x would have sounded a good chunk for them to pay in my mind so I’ll have to wrap my head around 24x! lol Thanks again!