Royalty Deals — Why I Love Them and How to Do Them
Royalty deals are not just transactions; they’re strategic partnerships that can yield long-term gains. James shares how this business model can provide sustained income and why it is well worth considering.
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.
Table of contents:
- Understanding revenue share deals
- Getting started with revenue share deals
- Deep dive into revenue share dynamics
- Building your revenue share strategy
- Selecting the right partners
- Legal and financial considerations
- Maintaining and growing your deals
- Beyond the basics
- Recap of key points
Understanding Revenue Share Deals
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.
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.
Benefits of revenue share deals
A key advantage of royalty deals is their simplicity — 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 — 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
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 involves creating a system to attract potential partners, such as attending mastermind events or setting up a dedicated lead capture page.
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.
Managing ongoing deals
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.
Maintenance of revenue share deals 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.
Deep Dive into Revenue Share Dynamics
Challenges and risks
With revenue share deals, 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. Differing responsibilities and life paces can also lead to dissolution of a rev share partnership.
More advantages of revenue sharing
James appreciates the simplicity and low risk of exiting revenue share deals. Most of his contracts 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’s 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.
Building Your Revenue Share Strategy
Positioning and authority
Having a strong personal brand and reputation for success is important in revenue share deals. This consideration partly prompted James’s 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, James brings a valuable general manager perspective to his partnerships.
Importance of connections
Maintaining strong relationships and a good reputation is crucial. 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 — managing a portfolio of clients and facilitating interactions and opportunities among them.
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.
Selecting the Right Partners
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 demonstrate the potential for high performance when his partner offers a product or service that is in demand among his clients — allowing for straightforward promotion through his podcast, social sharing, and personal introductions.
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.
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 are favorable for both parties, and when partnerships have concluded with a buyout, it has allowed him to receive multiples of his royalty without further obligations.
Legal and Financial Considerations
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.
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.
Understanding how revenue is calculated is also important — whether it includes merchant fees, and that figures represent net revenue accounting for any refunds.
Buyout clauses
Buyout clauses are hugely beneficial in revenue share deals. They can prevent resentment from partners over ongoing payments, especially when these payments become substantial.
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.
Maintaining and Growing Your Deals
Communication cadence
Maintaining close, regular communication with partners is crucial, 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. James notes this model may not be suitable if you prefer short-term engagements with clients — a retainer model may be preferable.
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 alleviate the loneliness of entrepreneurship. There are other collaborative benefits too, such as sharing valuable insights and innovations through a dedicated channel with his partners.
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 stay hands-off from the accounting aspects. This system has functioned effectively for eight years.
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: “Keep your deals fluid to keep them alive.”
Beyond the Basics
Comparing with affiliate marketing
James’s 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.
James 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.
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. 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.
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.
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 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.
Liked the show? Enjoy all the episodes when you subscribe on Apple Podcasts.