Revenue sharing arrangements are a common strategy for businesses in Malaysia to work together without having to set up a new entity, namely an incorporated joint venture.
Naturally, to ensure a smooth working relationship, all parties should be in alignment with key details of the arrangement, and to that end, this article explains:
- revenue-sharing versus profit-sharing;
- how it can be structured from a legal perspective; and
- common pitfalls to watch out for
Let’s begin.
Revenue-sharing vs profit-sharing
In revenue-sharing, partners each take a share of revenue (based on sales or fees) generated without deducting expenses, while profit-sharing means profit after deducting an agreed upon list of expenses, whatever they may be.
| Model | Example |
| Revenue-sharing | Company A introduces customers to Company B and gets 10% of every sales invoice, regardless of Company B’s operating costs. |
| Profit-sharing | Two companies run a joint project and agree to split the profit 50:50, but only after deducting all agreed project expenses. |
Revenue-sharing is often simpler and faster to administer since it is tied directly to sales, which are usually transparent to both parties.
Profit-sharing, on the other hand, requires more detailed accounting and verification, as the receiving partner typically needs supporting financial records to confirm the accuracy of profit figures.
Implementation options
From a legal standpoint, revenue-sharing can be documented in two different ways depending on the nature of the arrangement:
A clause in an agreement
Some businesses choose to include revenue-sharing as part of the remuneration terms in a broader contract, such as a collaboration agreement or service agreement.
This approach works best when revenue-sharing is secondary to the main business deal. For example, in a service agreement, the primary focus may be the scope of services, but revenue-sharing is added as an incentive or reward mechanism.
A dedicated Revenue-Sharing Agreement
In some cases, parties draft a separate agreement dedicated solely to revenue-sharing.
This approach is more suitable when revenue-sharing forms the core of the commercial relationship. A standalone agreement allows the parties to spell out key terms in greater detail. It also creates a cleaner legal document that can be referred to independently if disputes arise.
3 common mistakes to avoid
Revenue-sharing are simple, but many arrangements break down due to three poorly defined terms:
- payment terms:
- revenue: and
- revenue-sharing conditions
Examples below illustrate details that might be included (e.g., exact timeframe, triggering events). However, the clauses in the actual agreement will, and should, contain more comprehensive provisions to address different scenarios, minimise ambiguity, and clearly set out each party’s rights and obligations.
1. Payment terms
Is the revenue share due once the customer signs the contract, when the full invoice is paid, or only after a certain percentage has been collected?
Without clarity, one party may feel being treated unfairly if payments are delayed or only partially received.
Example of clearly defined term: Revenue share is payable within 14 days after the customer makes full payment.
2. Revenue
Should revenue be based on the full invoice, or after deducting discounts, refunds, and credit notes? If a customer is given a discount, should the revenue be based on the original or discounted price?
Example of clearly defined term: Revenue share will be based on net amount received after deducting discounts and refunds.
3. Revenue-sharing conditions
If a customer cancels or defaults, is the revenue share still payable? Does the sharing continue for repeat purchases from the same customer, or only for the first deal?
Example of clearly defined term: Revenue share applies only to the first successful transaction with each referred customer.
Let ELP bulletproof your revenue-sharing arrangement
If you are planning a revenue-sharing arrangement, whether a referral deal or a collaboration, we can help you draft practical clauses or a standalone agreement that fits your business.
Getting the terms right from day one not only protects your cashflow but also prevents disputes that could sour the partnership.
