What Every Profit-Share Agreement Should Get Right
Profit-sharing only works when expectations are explicit. This article covers the critical elements that ensure clarity, protect value, and prevent disputes before they arise.
Gerry McInerney
7 mins read
Jan 21, 2026
Bringing a minority shareholder into a family business can offer real benefits — fresh expertise, stronger alignment, and a sense of shared ownership. Sometimes it’s the right move for immediate operational or strategic reasons. But the longer-term implications often only become clear when there’s a change of ownership on the horizon.
From the minority shareholder’s perspective, becoming a “part-owner” can seem attractive. Yet the economic reality is often more nuanced. A minority shareholding may carry a significantly lower realisable value than its proportionate share of net assets, particularly where no put or call option exists. Without a clear exit route, it can be difficult — sometimes impossible — to realise value at a time that suits the minority holder, whether due to a change in employment, illness, disability, retirement, or death.
These issues become even more complex when the external party is both a fee-earning service provider and a participant in the business’s distributable profits. A well-structured profit-share agreement is essential to avoid misunderstandings and protect both sides.
Define the Nature of the Arrangement
Is the person/company who has negotiated to receive a share of the profits:
• A shareholder, entitled to dividends? or
• A service provider, earning a performance-related bonus?
The agreement must be clear with regard to the nature of the payment – is it contemplated that the service provider/minority shareholder is to receive a dividend on the shares or is it intended that the service provider can gain a performance related bonus by raising an additional charge for services provided in earning those profits?
A bonus is a business expense; a dividend is a distribution of after-tax profits.
Blurring the two leads to confusion and misaligned expectations.
Set Out How “Profit” Will Be Calculated
Whether the arrangement is for a share of profit to be billed as an additional fee for services or for a dividend based on having a share in the equity, clarity on profit calculation is critical:
• What constitutes distributable profit for the purposes of the agreement?
• How are exceptional or non-recurring items treated?
• Are financing costs included?
• When are profits considered “distributable”?
This is the area where most disputes originate — precision matters.
Control Discretionary Expenditure
To protect the integrity of the profit pool, the agreement should:
• Set limits on directors’ remuneration and benefits
• Require joint approval for discretionary or unusual expenditure
• Establish rules for related-party transactions
This prevents erosion of profits through unilateral decisions.
Address Cash Retention Needs
Family businesses often need to reinvest in:
• Working capital
• Equipment and refurbishment
• Growth opportunities
The agreement should specify how much cash must remain in the business before any bonus or dividend is calculated or paid.
Provide Clear Rules for Minority Share Disposal
Where minority shareholders are involved, the agreement must set out how and when their shares can or must be sold. This includes:
• Put options allowing the minority shareholder to require the majority shareholder or the company to buy their shares in defined circumstances
• Call options enabling the majority shareholder to acquire the minority stake on agreed terms
• Valuation principles, including whether valuation is based on earnings, assets, or an agreed formula, and whether minority discounts apply
• Funding mechanics, particularly where the company is the intended acquirer — the agreement should reflect the company’s financial capacity, legal constraints on share buybacks, and whether payment can be staged
• Trigger events, such as cessation of employment, retirement, incapacity, death, or a change in control
Without these provisions, minority shareholders can become “locked in,” and majority shareholders can face uncertainty at critical moments.
Plan for the “What ifs”
A robust agreement anticipates life events and business changes. It should cover:
• Death or long-term illness
• Change in ownership or control
• Cessation of services by the minority participant
• Voluntary or involuntary exit
• Material underperformance
These provisions protect continuity and reduce the risk of conflict.
Distinguish Clearly Between Bonus and Dividend
A performance bonus is:
• A fee
• Tax-deductible
• Payable regardless of shareholding
A dividend is:
• A distribution to shareholders
• Payable only from distributable reserves
• Governed by company law
The agreement must make this distinction unmistakable.
Include a Dispute Resolution Mechanism
Even with careful drafting, disagreements can arise. A structured process — mediation, expert determination, or arbitration — helps resolve issues efficiently and preserves relationships. A profit-share agreement is more than a legal formality. It’s a governance tool that aligns incentives, protects long-term value, and ensures both parties understand exactly how success will be shared — and under what conditions. If you don’t have one you are inviting uncertainty and possible exposure to significant costs in dealing with litigation.
Any questions? Contact Gerry McInerney at Ashford Advisory - info@ashfordadvisory.ie