What Is Profit Sharing?
Profit sharing agreements allow investors to receive a predetermined percentage of a company's net profits for a specified period. Unlike equity ownership, you don't hold shares or voting rights, but benefit directly from the company's profitability.
This investment structure is common in Ghana for supporting established businesses with proven profitability, particularly in sectors like agriculture processing, manufacturing, and professional services.
Key Difference from Revenue Sharing
While revenue sharing is based on gross sales, profit sharing is calculated after deducting all business expenses, taxes, and operational costs. This means higher potential returns but also higher dependency on efficient business management.
How Returns Are Calculated
Net Profit Calculation
Profits are calculated as total revenue minus all operating expenses, taxes, interest payments, and depreciation.
Your Share
Receive a fixed percentage of net profits, typically ranging from 5-25% depending on investment size and company structure.
Example Calculation
Investment: GHS 20,000 for 15% profit share
Company Performance:
- • Annual Revenue: GHS 500,000
- • Operating Expenses: GHS 350,000
- • Taxes & Other Costs: GHS 50,000
- • Net Profit: GHS 100,000
- • Your Annual Return: GHS 15,000 (15% of GHS 100,000)
- • Return on Investment: 75%
Distribution Models
Annual Distribution
Profits calculated and distributed once per year after audited financial statements are completed.
Quarterly Distribution
Based on quarterly financial statements, providing more frequent but potentially less accurate distributions.
Cumulative Model
Losses in one period can offset profits in subsequent periods before distributions are made.
Non-Cumulative Model
Each period stands alone - losses don't affect future profit distributions.
Your Rights and Benefits
Financial Transparency
Access to audited financial statements and profit calculations
Performance Alignment
Your returns align with company profitability and efficiency
Audit Rights
Right to verify profit calculations through independent audits
High Return Potential
Can generate significant returns if business is highly profitable
What Affects Your Returns
Operating Efficiency
Companies with higher operating margins and cost control will generate more profits to share.
Accounting Practices
How expenses are classified and depreciation is calculated significantly impacts net profit.
Tax Structure
Corporate tax rates and available deductions affect the final profit available for distribution.
Reinvestment Policies
Companies may retain profits for growth, affecting immediate distributions to investors.
Risks to Consider
Profit Volatility
Profits can fluctuate significantly - no profits means no returns, regardless of revenue levels.
Expense Manipulation
Companies might inflate expenses or defer revenue to minimize reported profits.
No Control Over Operations
You can't influence business decisions that affect profitability and efficiency.
Accounting Complexity
Profit calculations can be complex and subject to different accounting interpretations.
Quick Facts
Legal Framework
Profit sharing in Ghana is governed by:
- • Contracts Act, 1960 (Act 25)
- • Companies Act, 2019 (Act 992)
- • Income Tax Act, 2015 (Act 896)
- • Partnership agreements and contracts