8. ALLOCATION OF PROFITS

This is generally the most interesting and the least straightforward section of the Heads of AgreementHeads of Agreement: a non-binding summary of the main issues on which the parties intend to base an agreement.. An agreement may start out dividing profits equally. It gets complicated by the parties’ other businesses or contracts, by their special equipment, or by their relationships with other firms.

The simplest basis for the allocation of profit is share ownership. Say an ADC holds 60% of the shares and its partner holds the rest. If there was a $100,000 profit,, the ADC would get $60,000 and the partner would get $40,000.

But the scope of the business and the benefits contributed by each party can add "wrinkles" for the negotiators to iron out.

Say one partner wants exclusive access to benefits from a certain market segment for a period of time. For example, one partner might contribute a marshalling yard to a trucking JV. That partner might then claim a certain percentage of the profits for the use of the yard.

Then again, you may have a business that you want to expand with the assistance of a minority partner. The intended partner is poor in cash, but rich in management or marketing expertise. If the distribution of the JV’s profits is based only on contributed capitalCapital: cash, property, equipment, services, and contracts or leases., that firm may not be interested. To sweeten the deal, you could agree to make the profit allocation reflect expertise as well as contributed capital. Alternatively, make this minority partner responsible for the most lucrative part of the business. Then they could get more of the profit from that area, but less of the profit from other areas.

Kitsaki's trucking JV reserved market niches for each partner. (See Topic “Scope of Business” above, p. 6-18). As a result, the division of profits had to be very complex. Kitsaki's partner reserved for itself most of its existing markets and contracts north of the 54th parallel. When those contracts expired, the JV could then try to renew them. If it renewed them, the standard profit sharing formula would apply.

Critical to the successful negotiation of this section is your ability to put yourself in your partners' shoes. Negotiators must acknowledge the benefits that each party brings to the table. To move the discussion along they must remained committed to Win-Win.