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Sean Ross is a strategic adviser at 1031x.com, Investopedia contributor, and the founder and manager of Free Lances Ltd.
Updated June 16, 2024 Reviewed by Reviewed by Chip StapletonChip Stapleton is a Series 7 and Series 66 license holder, CFA Level 1 exam holder, and currently holds a Life, Accident, and Health License in Indiana. He has 8 years experience in finance, from financial planning and wealth management to corporate finance and FP&A.
Revenue sharing is the regular distribution of a portion of corporate wealth to certain stakeholders, such as employees and business partners, as an incentive.
In a revenue-sharing program, stakeholders get a share of the profits and, in some agreements, bear a share of any losses. Revenue sharing can be a performance-based policy for employees, an incentive-based policy for corporate partners, or an award-based policy for players in a professional sports league.
The practical details vary but the conceptual purpose of a revenue-sharing program is consistent: It uses profits as a motivator for increased efficiency or continued innovation. It has become a popular tool to promote partnerships, increase sales, or share costs.
Private businesses aren't the only ones that use revenue-sharing models. The U.S. and Canadian governments use tax revenue sharing between federal, state, and local levels of government.
Revenue sharing takes many forms but each iteration involves sharing operating profits or losses among different financial actors.
It is often an incentive program. For instance, a small business owner may pay associates a percentage-based reward for referring new customers.
It may also be used to distribute profits from a business alliance. When companies jointly produce or advertise a product, a profit-sharing system might be used to ensure that each entity is compensated for its efforts.
Several major professional sports leagues use a revenue-sharing model to allocate the proceeds of ticket sales and merchandising among teams. For example, the managers of teams in the NFL pool large portions of their revenues and distribute them among all members.
In 2020, the NFL and the players' union agreed to a revenue share split that would pay the team owners 52% of the revenue generated while players would share 48%. In 2023, the NFL generated about $20 billion in revenue, meaning that slightly more than $10.4 billion was disbursed to the teams while the remaining was paid out to the players.
Various kickers and stipulations can be added to revenue-sharing agreements. For instance, if the NFL season is extended in the coming years, the players would receive additional revenue or a kicker if advertising revenue from TV contracts increased by 60%. In other words, revenue-sharing agreements can include percentage increases or decreases in the future depending on performance or specific metrics.
Revenue sharing can also take place within a single organization. Operating profits and losses might be distributed to stakeholders and general or limited partners.
As with revenue-sharing models that involve more than one business, the inner workings of these plans normally require contractual agreements between all involved parties.
The growth of online businesses and advertising models has led to cost-per-sale revenue sharing between content providers and advertising companies. The proceeds of sales generated through an advertisement are shared by the company offering the service and the site that displayed the ad.
Some web content creators are compensated based on the level of traffic their writing or design generates, a process that is sometimes referred to as revenue sharing.
Revenue sharing is used in a regulatory context in the Employee Retirement Income Security Act (ERISA), which imposes guidelines on the management of fund providers and mutual funds.
ERISA establishes rules for fiduciaries (or investment companies) to follow to prevent misusing plan assets. Standards can include the level of participation needed by employees and the funding of retirement plans.
ERISA allows revenue sharing for retirement plan sponsors so that a portion of earned income from mutual funds would be held in a spending account. The funds must be used to pay for the costs of managing and running the 401(k) plans. The amount of money to be allocated and deposited into the revenue-sharing accounts is stipulated in the revenue-sharing agreement. The fiduciary must notify investors of how the revenue is spent.
How are losses split between parties in a revenue-sharing program? Each party is responsible for paying a share of the losses in this type of business model.
Participants in revenue-sharing models need to be clear about how revenue is collected, measured, and distributed.
The tracking of events that trigger revenue sharing, such as a ticket sale or an online advertisement interaction, is not always transparent to everyone involved. As such, contracts often outline these methods in detail. The parties responsible for the processes are sometimes subjected to audits for accuracy assurance.
Some types of revenue sharing are strictly regulated by government agencies. The advisory council for the Employee Retirement Income Security Act formed the Working Group on Fiduciary Responsibilities and Revenue Sharing Practices in 2007 to address perceived issues with the practice of revenue sharing for 401(k) plans.
The Working Group determined that revenue sharing is an acceptable practice, and new rules related to transparency were implemented under the authority of the Department of Labor (DOL). The Working Group also determined that it should take the lead to formally define revenue sharing in defined contribution plans.
Revenue sharing can be used as an incentive to get partners and associates to help companies build their brand and business. This is done by distributing revenue every time someone recommends a new client or customer. This allows businesses to form strategic alliances and partnerships with external stakeholders.
Adopting this kind of strategy can be cost-effective. It creates an incentive for partners to channel more business toward a company and cuts back on certain expenses. Since these are partnerships, companies don't have to spend on wages, benefits, or other costs related to employing workers.
Companies that use revenue sharing should ensure that the terms and conditions are laid out in a written contract. They should also make sure that these partnerships ensure exclusivity. After all, companies don't want their alliances to stray and funnel business to their competition.
Revenue sharing and profit sharing both involve the distribution of money among certain parties, but they are not the same thing.
Revenue sharing distributes revenue and losses equally among those involved. Profit-sharing only distributes profits to each party—not total revenue. This means that there is only a distribution if there is a profit, so nothing is distributed if the company nets a loss during a certain period.
Some of the most common types of profit-sharing plans offered by companies to their employees include:
Companies use profit-sharing plans to incentivize their employees. It provides motivation to work harder and ensure that the company is successful. It also promotes loyalty, as an employee who gets a share of the company's profits will be more likely to stay rather than jump ship.
A revenue-sharing percentage ranges anywhere between 2% to 10%. This will depend on how many stakeholders are involved and the size of the company.
To calculate revenue sharing, take the amount of an individual's contribution and multiply that by the percentage of revenue sharing that was set out.
A typical revenue-sharing agreement should identify the parties involved, their obligations and responsibilities, the percentage of revenue sharing, exclusivity, the length of the relationship, any means of arbitration, governing laws and jurisdictions that apply, and how amendments are to be handled.
The agreement must be signed and a copy must be given to all parties involved.
Revenue sharing is a common way for businesses to share in their success with key stakeholders. It can be used as a marketing strategy to help channel business their way. But it can also help them spread out the risk by ensuring that their partners are responsible for their losses, too.
Agreements typically range from 2% to 10% of revenue shared, depending on their size. But it's important that all the rights, responsibilities, and obligations are laid out and understood by companies and their partners to avoid any problems in the future.
