Most people have the wrong idea about revenue share deals or don’t know much about them at all. This article will hopefully change that.
This is a business model that we don’t hear about so often that we’ve been doing for a while, and we’re excited about this is the kind of business model that will let you work less, make more.
Charley Valher on why rev share deals are a great business model
What Is Revenue Sharing?
Revenue share deals are very different from profit share, fee-for-service, or equity. They are also known as royalty deals.
You earn by working with a business and receiving a percentage of their revenue stream. The royalty you get is either for the entire business or a division of it.
What Is a Reverse Revenue Share Deal?
I came up with the reverse revenue share deal where you own the asset, and you hire in an expert on a performance basis. So this person wants to do a revenue share deal, but a reverse revenue share deal, because they already own a business and they want someone to actually drive it, run it, grow it, manage the team and allocate capital, essentially be a CEO or general manager.
Am I suggesting that he offer a revenue share deal to that person, or pay them a set monthly retainer? So the answer is yes, you could do that. You could definitely pay a set monthly retainer, that’s a very standard operation to hire a general manager or a CEO. The type of people who are general managers or CEOs are generally going to want some skin in the game from you, they’re going to want some money, because usually they have a job, and usually they’re already earning money.
So that means they’re going to need some kind of base or retainer often to be able to do the job. Otherwise, they wouldn’t be able to take the risk. If they’re so good at what they do, and they want to take all the risks and it’s either going to be a side gig, or they probably already have their own business.
So the candidate pool will probably be quite slim for this. Where would you find someone like this? Probably from your own client base. Someone who’s actually been through your program, who knows your business and has high competencies.
Types of Revenue Sharing
There are three common types of revenue sharing.
In professional sports, players split the revenue with team owners.
In companies, operating profits are divided between partners and stakeholders.
In this article, we also discuss another type of revenue sharing, which is REVERSE revenue sharing.
Now before we get into the specifics of structuring a rev share deal, let’s take a look at the types of problems that revenue sharing can help solve.
10 Problems that Revenue Share Deals Can Solve
- To start or buy a business, you need funds – the kind of cash most of us can’t fork over. Revenue share deals give you access to a business without paying any money.
- Revenue share deals have less legal risk. Unlike a business with partners that can fail spectacularly at times, revenue-sharing is safe.
- Starting an international business is challenging. You have to set up an entity, find a partner in the country, etc. Rev share deals soar through these hurdles.
- Most business models don’t offer precise results. With revenue sharing, you get hard, measurable results.
- 50:50 partnerships often are lopsided and more beneficial to one partner. Revenue sharing puts you on equal footing.
- Cost allocation lines are a blur in business. You may prefer to depreciate a car through the company, while your partner may not. Revenue deals put in place clear and distinct lines.
- Service contracts such as retainer-based put a limit on how much you can earn. Rev share deals are performance-based and not limited. The rewards are often far more generous than service contracts.
- Contracts are short-term and low leverage. The cash flow stops at some point, an issue that doesn’t occur with revenue share.
- Most business deals take a long time to implement. Revenue sharing is ready to launch typically in a few days.
- To earn a substantial income from other business deals, you need a massive portfolio. In the case of revenue share, you just need the right deals and not many of them.
9 Benefits of the Revenue Sharing Model
- A revenue share model is designed to be a win-win business model. You get a percentage of the revenue, and the business partner benefits from your skills.
- Setting up is simple. While a handshake is sufficient, you should always put it in a written contract.
- You can scale revenue-sharing models without injecting any money.
- There is minimal risk to you and the business owners. The main dangers are external circumstances that prevent you from getting paid, which is always out of your control.
- Payment is straightforward. You generate an invoice every month, and the money is credited to your account.
- It’s a performance-based model. Unlike fee-for-service, rev-share incentivizes the partner bringing the skills to knock it out of the park, and the rewards can be more significant.
- The model frees up hours of your week, yet your income stream still climbs. The commitment required is your intellectual property, not time, giving you more freedom.
- They have an inbuilt fail-safe because you earn from different deals. Therefore, there is no single point of failure.
- The structure of revenue sharing models focuses on shared success. Everyone is aligned to increase the revenue stream. So, you earn more.
How To Structure Rev Share Deals?
Landing a fantastic revenue-sharing deal is dependent on its structure. The foundation is always the same and remains performance-based.
You get paid when the business earns more. For example, for every dollar you make for a business, you might get ten cents.
How you build upon this foundation differs as there is no rule of thumb to revenue model structures. Each one has its incentives and twists.
For an information business, the margins are more notable. So, you can structure at a higher percentage.
For e-commerce businesses, profit margins may be as low as 10%. So, the portion you ask has to be less. Luckily, the volume can be higher.
What is the difference between profit sharing and revenue sharing?
Often people get confused between profit and revenue sharing. The two are poles apart.
Profit-sharing deals split the profits – that’s the revenue left after all costs are subtracted. They are ambiguous, making it easy to manipulate the numbers.
In revenue sharing, it’s a top-level income split. This is the income generated by selling goods or services. That’s why rev sharing is a pure metric – you either earn or don’t.
Commission-only is another way to look at revenue-sharing deals.
Written revenue share agreements: why should you always have one?
Implementing revenue share deals doesn’t take time. At most, a few weeks, and you spend most of it on writing agreements.
It is vital to have a lawyer write it down because the agreement is legally complicated. When they’re put on pen and paper, it saves you from disputes and hassles down the line.
It is also a great way to define the agreement item by item. So, both you and the business partners are on the same page.
What should you expect from a revenue share deal?
Your expectation from a revenue share deal should be simple – you earn more when they make more. The more effort you put in building the business, the more significant piece you get.
Keep in mind that the percentage you receive is still a factor of the income stream. You cannot ask for a 20% revenue when the business makes only 10%.
A good idea is to keep the percentage between 5 to 15.
What to look for in a revenue share deal?
There are two things to look for in rev share deals:
1. That it should leverage your asset.
2. Every contract should synchronise with your other deals.
The first strengthens the deal, and the second allows you to play different deals with each other. Both help you create more income and a better portfolio.
Revenue sharing lessons for beginners
Your first revenue-sharing deal will be average at best, and you’ll likely make mistakes—power through it and just start. As you gain experience, each arrangement will improve.
Always add a buy-out clause in the agreement. It helps address a scenario when the revenue share partner no longer wants to cut a check.
Not all rev share deals are created equal, nor will they all work great. Like shares or properties or choosing a car to drive, there’ll be good ones and bad ones. You have to set your filters carefully. And over time, as you build your portfolio, you’ll learn which ones suck and which ones are awesome. My best rev share deals are 20 times better than my worst.
You also need to prepare for the possibility that your revenue share partner no longer wants to pay you.
There can be all sorts of challenges to having a business partner, both in revenue sharing but also in affiliate marketing. In this podcast episode, James, Matt Wolfe and business partner Joe Fier share some of those experiences.
How to get help structuring a revenue share deal?
Revenue share deals are not silver bullets. That said, they still are a fantastic earning opportunity.
But structuring the best deal takes skill, experience, and finesse. The more value you add to the business, the more you make.
If you have more questions that aren’t covered in this article, we may have covered them here, where we answer advanced questions around this topic.
We’ve been structuring revenue share deals for years, for our own business and also for many of our members. So if you’d like support to ensure you don’t make many costly mistakes (like we once did), consider receiving mentorship and guidance through JamesSchramko membership.
Just want the revenue share training? Click here to get the course for FREE on our products page