I've been asked to ADVISE an established small biz in exchange for a PERCENTAGE of monthly revenue.
THREE SPECIFIC QUESTIONS:
1. This is a small biz that is cash flow positive monthly -- should I ask for a larger % of gross or smaller % of net?
2. Anyone have contract examples they are comfortable pointing to or sharing?
3. Accountability of payouts -- I'm guessing I need to ask for ongoing access to bank account and sales reports?
Thanks kindly,
Josh
Josh,
I am a contract and negotiation expert. I have over 8 years of small business advising and consulting experience. A more detailed bio is easily available on all social media and this site.
Let me be a lawyer and give this disclaimer
*This is not legal advice, and this information does establish an attorney/client relationship. This is merely for educational purposes*
Here are some short answers to get you started, hopefully in the right direction.
1. If it is an option, always ask for a % of the gross. There is a term that I use, "companies WILL net you to death!" Legally, companies have a wide range of what can be written off as an expense, thus shrinking the net profit, thus affecting your rate.
If you can't get a % of gross, make sure you have a detailed list of expenses that are routinely taken out every month, and negotiate from there.
Why?
In some (if not most) businesses there are "necessary" (internet and rent) and "unnecessary" (payment on Lexus for CEO) expenses. Your goal is to eliminate all the unnecessary expenses from the raw number that you will be taking your percentage from.
2. There are many template contracts available. I think entrepreneur is trustworthy (and free).
Here is the link http://goo.gl/fz36zg
3. I think it would be smart to ask for some type of accounting sheet. Thus, how would you know if they are telling you the truth about profits and/or net.
An additional question to ask yourself, is what are the benefits to taking a percentage vs. a flat fee? I'm assuming the contract is going to be based on performance, thus another option can be a base fee, with bonuses after you hit certain numbers. Just something to think about.
I hope this helps! Good luck!
If you need more advice, schedule a call!
Either they have problems or looking for a fresh blood.
If you going to advise = fix a monthly fee. Advise is an opinion don't tie it up to percentage of income. Maybe your advice will not have an immediate effect. Ask 100% payment in advance/ or 50% before 50% after
If you going to be hands on = Grow their business and take a bigger chuck of growth income. Say that they are making 100K/month. Grow it to 300K and take 35% of it.. play with your ratios
Josh,
My experience is:
1-Net. It shows that you are committed to the value creation and not only bump sales (that maybe leave no profit). It also helps you get a better understanding of the company as you will get all the financial info of how do they get to that number. If you ask for sales only, you don't know how they are doing.
2-Sorry, can't.
3-Usually you will ask for the balance sheet or IRS reports (if in the US, gets more tricky outside). This should be good enough. Remember is all based on trust and mutual benefit.
One last piece of advise, set yourself accountable. Ask what do you need from me, how often, what do you expect, what do you want me to deliver. Put it on paper, so then you know that there will be no future problems on what you did. Advise is a complicated asset to value, as clear you can get, the better.
Advising a small, cash-flow-positive business in exchange for a percentage of monthly revenue is an exciting opportunity. Here are some considerations for your specific questions:
### 1. Percentage of Gross vs. Net Revenue
- **Gross Revenue**: This is the total revenue before any expenses are deducted. Asking for a percentage of gross revenue means your payout is not affected by the business's expenses. This can be advantageous if the business has fluctuating costs or if you're unsure about their expense management.
- **Net Revenue**: This is the revenue after all expenses have been deducted. Asking for a percentage of net revenue means you only get paid if the business is profitable. This aligns your incentives with the business’s profitability but carries more risk if the business's expenses increase.
Given the business is already cash flow positive, you might consider a smaller percentage of gross revenue to ensure a steady payout regardless of expenses. However, this depends on the business's margins and expense structure.
### 2. Contract Examples
While I can't provide specific legal contracts, here are some key elements your agreement should include:
- **Scope of Work**: Clearly define your advisory role and responsibilities.
- **Compensation Structure**: Detail the percentage of revenue and whether it's from gross or net revenue.
- **Payment Terms**: Specify how and when payments will be made.
- **Duration and Termination**: Outline the term of the agreement and conditions for termination.
- **Access to Information**: Specify your rights to access financial information to verify payouts.
Consider consulting a lawyer to draft or review the contract to ensure it protects your interests. You can also find templates on legal resource websites like Rocket Lawyer, LegalZoom, or similar.
### 3. Accountability of Payouts
To ensure transparency and accountability:
- **Access to Financial Reports**: Request regular access to financial statements, sales reports, and other relevant documents.
- **Bank Account Access**: While full access to the bank account might be too intrusive, you can ask for view-only access or regular bank statements to verify revenue figures.
- **Third-party Verification**: You could agree on using a third-party accountant to audit the financials periodically to ensure accurate reporting.
### Summary
- Consider a smaller percentage of gross revenue for a steady income stream.
- Use a detailed contract to outline responsibilities and payment terms.
- Ensure transparency by having access to financial reports or third-party verification.
If you need more specific advice or examples, consulting a lawyer who specializes in business contracts is highly recommended.
