Glossary
Preferred return (pref)
A preferred return (pref) is a return a cash partner is paid first, before the remaining profit is split between the partners.
A pref protects the money partner. If the deal makes a modest profit, the cash partner is paid their pref before the operator shares in the upside. If the deal does great, both share what is left.
Prefs are common when one partner brings most of the cash and the other runs the deal. The rate, how it accrues and when it is paid are all negotiated.
How it works
Run The Deal pays partners in this order: partner lenders first, then return of capital to equity partners, then the pref, then the profit split. A loss is shared pro rata to capital, and nobody earns a promote on a loss.
- Cash partner puts in
- $100,000
- Total profit after the sale
- $40,000
- Pref to the cash partner (8% for 1 year)
- $8,000
- Left to split
- $32,000
- Each side's 50% share
- $16,000
- Cash partner's total profit
- $24,000
Return of capital, the $100,000, is paid before the pref and is not profit.
What to watch
- Simple or compounding. Agree on how the pref accrues and over what period.
- Catch-up. Some deals let the operator catch up after the pref. Spell it out.
- Paperwork. Partnership terms belong in a written agreement drafted by your attorney.
A pref is one way to split. Others give the operator credit for sweat equity. Compare structures on the features page, and check deal profit with the flip calculator.
Keep going
Free tools
Run your next deal before you write the offer.
Run The Deal is in an invite-only beta. Ask for a spot and we will email you when it opens.