How to Negotiate a Percentage of the Net Profits When Consulting
One of the more difficult elements of being a consultant is getting fair value for your work. Sometimes what you deliver is far more valuable than a single set fee. In cases like this, one option is to negotiate a percentage of the profits directly derived from your consulting work.
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Instructions
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Identify your added value. According to The Negotiator Magazine, "studies indicate that 40 percent of the actual room for negotiation is never exploited because negotiators have not learned to identify and utilize the potential added value." Some examples of added value are reduced costs, increased efficiency and sales growth. Once you can concretely identify where your work adds value to the company, you are in a stronger negotiating position.
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Project your work's direct effect on the company's savings and/or earnings. One effective way to negotiate a percentage of profits is to use market projections. Build two market forecasts. The first should be a detailed market forecast of the product or service using your consulting work. The second should be a forecast without your work included. The difference in the forecasts provides a good starting point for the percentage of profits that you should request.
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Specify the parameters for payment. One common flaw in negotiating for a profit percentage is the lack of specific parameters. Some profit percentage agreements give a percentage to consultants of each product sold, with or without a bonus, for hitting sales goals. Other agreements may state that no percentage of profits is paid until certain sales goals are reached. Make sure during negotiations that each percentage point, bonus amount and sales goal is well defined before agreeing to a deal.
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Consider lowering your upfront fee. In many cases, consultants will both charge an upfront fee for the consulting work and ask for a percentage of profits. If the consultant believes strongly in the product and his work, then lowering or eliminating any upfront fee to gain a portion of the profits may be beneficial. This flexibility can be another tool in the negotiating process.
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Determine the length of the agreement. Another area for negotiation is the length of time payments will be made. In many cases, implementing a consultant's recommendations can take weeks or longer. Therefore, it is important to negotiate a longer term agreement so that you can reap the benefits of your work. In some cases, you may be able to negotiate a percentage of profits in perpetuity, but more likely you will need to settle on a time frame that is conducive to both parties.
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Sign a contract. The one thing consultants do not want to face is non-payment. In court, any verbal agreement that you may have made with another party is difficult to prove and enforce. A signed contract protects both parties. The written contract should specifically state the terms of the agreement, percentage payment amounts, times to be paid, and the length of the agreement, among other issues. This makes it easier for the courts to enforce.
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Tips & Warnings
Emphasize the benefits and importance of your work.
Be flexible where you can.
Have a reasonable amount in mind before beginning negotiations.
