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Revenue Sharing: Definition, Model & Examples

Revenue Sharing: Definition, Model & Examples
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  • 0:02 Understanding Revenue Sharing
  • 1:04 Stakeholders in a Corporation
  • 2:00 Revenue Sharing in Action
  • 3:03 Other Revenue Sharing Examples
  • 3:51 Lesson Summary
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Lesson Transcript
Instructor: Michael Cozad

Michael is a financial planner and has a master's degree in financial services.

This lesson explains the concept of revenue sharing. It provides a model and an in-depth look at revenue sharing in action. When you are through, you can take a brief quiz.

Understanding Revenue Sharing

Meet Harry, a contractor, and Marv, a real estate agent. Harry and Marv both reside in the same neighborhood and have known each other since they were in elementary school. Living and working in the same neighborhood and having occupations in housing, Marv and Harry frequently refer business to one another.

One day, however, they are discussing a potential job when Harry mentions to Marv that they should be the ones buying the homes, fixing them, and selling them. 'What a great idea,' thinks Marv. It is on that day that Harry & Marv Homes is born. Many people would assume that since Harry and Marv both own the corporation that the profits and losses are distributed evenly. This distribution of profits is known as revenue sharing.

However, there may be many more stakeholders than just Harry and Marv. Stakeholders are those whom have an interest in a business. For example, a bank that loans Harry and Marv money to purchase equipment is considered a stakeholder because they would like for Harry and Marv to pay them back what was borrowed, plus interest.

Stakeholders in a Corporation

Though Harry and Marv are skilled in their occupations, they happen to reside and work in an underprivileged area. They need outside financing to jump-start their business. They begin to seek out potential investors whom will be their stakeholders.

Harry and Marv have developed a business plan, which calls for $200,000 to begin operations. Harry is willing to devote $75,000 of his savings to the new business and Marv matches this. They discuss this idea with their friend, Gus, who pitches in the remaining $50,000. They discuss ownership of the business and agree that ownership should be proportionate to the member's contributed capital.

Harry: $75,000 / $200,000 = 37.5%

Marv: $75,000 / $200,000 = 37.5%

Gus: $50,000 / $200,000 = 25.0%

Total: $200,000 / $200,000 = 100%

Revenue Sharing in Action

During the first year, Harry and Marv are able to purchase, renovate, and resell three homes. After paying for labor, advertising, and other expenses, they are able to profit $12,000. Due to the ownership structure in effect, the $12,000 profit is distributed in the following manner:

Harry: 37.5% x $12,000 = $4,500

Marv: 37.5% x $12,000 = $4,500

Gus: 25.0% x $12,000 = $3,000

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