One of the questions I get asked on a regular basis is, “How much should I ask for when setting up a Joint Venture? What percentage is reasonable?” And that’s a very good question. Different businesses have different profit margins. Some have higher overhead and costs of sales and than other.
- If you sell computer hardware, for example, you make a very small profit – most of your profit is in the software, service, keyboards, etc.
- If you’re selling a service, you make big profits, but you can also have varying costs.
So we have to keep this in mind.
- Some people have certain restrictions on their ability to pay out commissions, like certain financial planners or dentists.
- Others are not used to paying commissions, like the realtor who offered me $75 for a buying referral!
So here is a way to approach this challenge.
Step 1: Do Your Homework.
I know I keep saying that, but information is power when it comes to negotiations. That’s good news, because most people talk a lot, but don’t listen much, so when you listen a lot, you learn a lot.
- Find out about the business and its profit margins.
- Make sure they’re telling the truth when they say they’re not allowed to pay commissions. Sometimes, they’re just plain lying, because they’re cheap!
- Talk to their competition.
- Ask employees questions.
With this you will get a feel for the amount of profit they make, so you know what to ask for.
Step 2: Educate Them About the Money in the Back End
You might make no profit at all on the first sale (break even on the first transaction) but you can make a lot on future transactions, referrals, additional products and services sold through other vendors on a JV basis and on and on. If people understand the Back End correctly, they will be eager to give away a generous portion of the front end.
- Show them the principle of Incremental Profits (profits made when overhead and salaries are already covered and the new sale is incremental, like putting an extra seat into a seminar or serving another plate of food when the food cost is only 32%)
Step 3: Understand Negotiating Techniques
- By all means start high and drop, but don’t start greedy.
- Be prepared to walk away from any deal at any time.
- Remove risk from both parties.
- Work WITH the competition. Savvy entrepreneurs know their competition can be their greatest ally.
Most of all, approach any Joint Venture proposal from a position of strength – know more than the person you’re dealing with. Be well prepared.
