For many businesses and start-ups, profit share agreements provide an equitable way to distribute earnings among business partners, key employees, investors, or even end customers. In cases where a major client or customer contributes to the business’s growth, offering a profit share arrangement can create a mutually beneficial relationship that drives both loyalty and revenue.

In this guide, we’ll explain what profit share agreements are, why they’re valuable, the essential elements to include, and tips for drafting one that’s fair and enforceable.

What is a profit share agreement?

A profit share agreement is a legally binding contract that specifies how a business’s profits will be distributed among partners, investors, certain employees, or even customers. In some cases, an end customer may be involved in a profit share agreement, especially if they contribute to product development, distribution, or sales performance. By formalising each party’s share of profits, this agreement ensures that everyone is compensated fairly for their contribution to the business’s success.

Why profit share agreements are essential for small businesses and start-ups

Profit share agreements benefit both businesses and stakeholders by creating transparency around earnings distribution. Here’s why they’re particularly valuable:

• Promote fairness and motivation: By clarifying each party’s share, these agreements incentivise partners, key employees, or even end customers to contribute to the company’s success.

• Minimise disputes: A well-defined agreement reduces the likelihood of disagreements over earnings distribution, promoting stability in business relationships.

• Attract and retain customers and talent: Offering a profit share can build stronger relationships with key customers or contributors, encouraging loyalty and supporting long-term growth.

Key elements of a profit share agreement

A profit share agreement should be tailored to your business needs and the specific relationship between the parties involved. Here are the essential components to include:

1. Profit-sharing percentage

Clearly define the percentage of profits each party will receive. This can be based on factors like ownership, investment, contribution to the business, or terms agreed upon with a key customer.

Example: “Party A will receive 50% of profits, Party B will receive 30%, and Party C (end customer) will receive 20%.”

2. Definition of “profits”

It’s important to clarify what is meant by “profits” in the agreement. This section should define whether profits are based on gross or net earnings, and account for business expenses, taxes, and other deductions before profit is distributed.

Pro Tip: Specify that profits refer to “net profits after all business expenses and taxes have been deducted.”

3. Payment schedule

Outline when profit payments will be made, such as monthly, quarterly, or annually. A clear payment schedule ensures that all parties know when to expect their earnings, which can be especially important when dealing with external customers who are expecting returns.

Considerations: Include provisions for potential delays or adjustments if profits fluctuate significantly.

4. Duration of agreement

Specify how long the profit share agreement will be in effect. This is particularly useful for arrangements involving end customers, who may only be eligible for profit shares for a set period or project.

5. Conditions for termination

Establish the conditions under which the agreement may be terminated, such as if a partner leaves the business, if a key customer no longer contributes to revenue, or if certain performance targets aren’t met.

Example: If a customer decides to end their involvement in the business, the agreement may stipulate that their share of profits ends immediately or is subject to a buyout.

6. Rights and responsibilities

Outline the rights and responsibilities of each party to prevent misunderstandings. This is especially important if an end customer has a profit share, as they may have certain obligations, such as meeting minimum purchase or usage volumes.

Common scenarios for profit share agreements

Profit share agreements can be valuable in a variety of business scenarios. Here are some common examples where these agreements are particularly useful:

1. Business partnerships

When two or more partners are involved in running a business, a profit share agreement defines how profits will be split based on each partner’s ownership or contributions. This is particularly important in small businesses, where clear terms help build lasting, trust-based partnerships.

If you're considering bringing on a partner, check out our guide on choosing the right business partner for insights on finding someone who aligns with your vision and business goals.

2. Start-up equity and advisor arrangements

Profit share agreements are common in start-ups, where early-stage advisors, investors, or key employees may receive a share of profits in addition to traditional salaries or equity. This arrangement helps attract skilled professionals and incentivises long-term commitment.

Considering a co-founder? Discover the benefits of having both a technical and non-technical co-founder for a well-rounded start-up team that combines product development with business strategy.

3. Project-based collaborations

In cases where a project involves multiple contributors who may not be full-time partners, a profit share agreement ensures everyone is fairly compensated based on their involvement in the project. This approach works well for short-term partnerships or freelance collaborations.

4. Profit sharing with key customers

Some businesses offer profit shares to large or influential customers who significantly contribute to the company’s success. For example, if a customer provides essential distribution channels, sales referrals, or recurring business, a profit share agreement can reward their loyalty and foster a closer partnership.

5. Family-owned businesses

Profit share agreements help family businesses clarify roles and earnings for family members who contribute to the business. This arrangement reduces the risk of conflicts over earnings and helps maintain a professional structure within the family business.

Tips for drafting a profit share agreement

A well-drafted profit share agreement should be fair, specific, and enforceable. Here are some tips to help:

1. Use clear, specific language

Avoid vague language that could lead to misunderstandings. Be precise about each party’s percentage, payment schedule, and responsibilities to prevent potential disputes.

2. Align profit shares with contributions

Consider each party’s role and investment in the business when deciding on profit shares. This can help ensure that the agreement feels fair to all parties and incentivises active contribution to the business.

3. Plan for potential changes

Businesses grow and evolve, so it’s wise to include clauses that allow for adjustments in profit shares if roles, contributions, or the business itself changes. For example, a customer who significantly increases their referrals may be eligible for a higher share.

How WhatsLaw can support your profit share agreements

At WhatsLaw, we know that navigating profit share agreements can be challenging for small businesses and start-ups. Our platform provides resources and templates to help you draft clear, enforceable agreements that protect your business and promote fair partnerships.

Conclusion: Secure your business with a fair profit share agreement

Profit share agreements are essential for any business that involves multiple stakeholders, ensuring that profits are distributed fairly and transparently. By clarifying each party’s role, percentage, and payment terms, these agreements support healthy, sustainable partnerships that benefit everyone involved.

Get exclusive access to our tools and start drafting your profit share agreement with WhatsLaw’s resources and build a foundation of trust and fairness in your business partnerships.