- A finder's fee is a cash commission paid to a coordinator or intermediary in a transaction between two parties, rewarding them for facilitating the deal. This fee can come in the form of a flat fee or a percentage commission.
- The party who initiates the process typically pays the finder's fee, but sometimes the cost is factored into a product or service's purchase. The fee percentage varies greatly by industry and company, typically ranging from 5%-35% of the transaction value.
- Offering a finder's fee can foster a sense of community, save time by having others find new prospects, and provide a low-risk investment since the fee is only paid if new clients are generated.
What’s one of the most effective ways to consistently acquire new customers? Leveraging word of mouth – in other words, creating a consistent network of people who will refer others to your business. A finder’s fee (or seller’s commission) can help establish this referral network.
What is a finder’s fee?
A finder’s fee is a type of cash commission paid to the coordinator or intermediary in a transaction between two other parties (a business and a potential customer).
The fee rewards the “finder” for bringing the interested parties together and facilitating the deal. After all, it is assumed the transaction would have never happened without the finder.
Sometimes, a finder’s fee is paid for a qualified business introduction. But usually, it’s tied directly to a sale.
It can come in two forms: a flat fee, and a percentage commission. This type of fee is also called a referral fee.
Who pays a finder’s fee?
Usually, the party who initiates the process pays the finder’s fee. This means that, in most cases, the company that created the finder’s fee agreement will pay these costs to intermediaries.
With that said, fee costs are sometimes factored into a product or service’s purchase. In this case, it would be the buyer that technically pays the fee.
There’s also third-party software you can use to help track and automate finder’s fee financing, including referral software if you choose to pay finder’s fees through a referral program.
What is the standard finder’s fee percentage?
The answer isn’t as clear-cut as you might expect.
Finder’s fee percentages vary greatly by industry and even by company. While typical referral fees generally range from 5%-35% of the transaction value, that’s a wide range, and some companies offer even more due to a competitive market. We’ll cover how to determine the best finder’s fee percentage for your industry later in the article.
How does a finder’s fee work?
When your finders hunt down new business, you’ll have new connections you may have not had access to previously. Once your business confirms that a finder has brought in a qualified lead or verified sale, you reward the person who brought you this lead or customer with the fee you’ve promised.
To make this process easier, most companies use some type of tracking software to confirm sales or qualified leads, and who exactly directed a lead or customer to your company’s website.
Before offering a finder’s fee, the best way to ensure it will work well is by offering quality products and services. It’s also a good idea to ensure there’s lots of buzz around your company, especially in the form of positive reviews and online comments. Offering the finder’s fee (incentive) on top of that will then bring even greater success.
One example of how a finder’s fee structure might work, from Architectural Window Products.
Why use a finder’s fee?
A finder’s fee encourages intermediaries to go above and beyond to spread the message about a business, and then rewards them for a job well done.
These programs foster a sense of community, and keep clients excited about your business.
This type of fee also saves you time by getting others to track down new prospects, and utilizing their locations and the relationships they’ve already built.
Perhaps the greatest benefit of enacting finder’s fees is that you have nothing to lose. Customarily, you only pay the fee if the finder actually generates new clients. That’s far from the risky investment of an expensive ad that could go unnoticed for the duration of the campaign.
Determining your finder’s fee percentage: 3 key factors
Here are three factors to remember while working on this part of your finder’s fee plan:
1. Servicing the deal and cost of goods sold
- Am I already compensating my own salespeople on a commission basis?
- If so, is the referring party a replacement for them, or do they just send the lead to the salesperson?
- Is there a service/consultative component of the sale?
- Is this a white-label type of deal where I am the service provider?
2. Length of the sale process
- Some sales processes take a long time to close. How long after a purchase does it count as a sale for the referring party?
- Say, within one month? Six months?
3. When and how you get paid
- How are funds received for the sale?
- Is this a recurring service?
- What about refunds or money-back guarantees?
All of these factors help you determine how much to compensate, when to compensate, and for how long. You want to be fair to all parties. Once a proper structure is put in place, everyone can win!
Tax and legal considerations
Highly regulated industries often have state or national laws or license rules that do not permit finder’s fees. Legal professionals, real estate, financial services, and automotive industries are the ones to be the most careful with. Check with your own state and or organization to be sure that a finder’s fee is legal for your location and industry.
You should also be aware of the tax implications of these fees. In the United States, if someone earns finder’s fees totaling $600 or more in a calendar year, they must pay taxes on them.
Something else to consider, though, is that if a previous customer refers others to your business (like in a refer a friend program or with a referral software) the amount you pay to the referrer can be considered a refund or discount. This is similar to the process behind manufacturer’s mail-in rebates.
What is a finder’s fee agreement and what’s in it?
A finder’s fee agreement (or referral fee agreement) is a formal agreement binding the finder and the business owner, and in which the finder’s fee details and conditions are outlined. It’s up to you whether you want to outline a formal agreement.
Most agreement templates include the following sections:
- Role of the finder
- What is considered an accepted referral
- Most are tied to a sale, but you can accept them retroactively.
- Amount or percentage you’ll pay
- There are many ways to calculate the fee; see our other sections above
- Fee schedules
- When and how you’ll pay.
- Don’t forget to consider return and refund policies.
Remember that finder’s fees involve your money, and there are things that can go wrong. It is worth the time upfront to come up with an agreement to protect your business from fishy or unethical activity, especially since the costs involved can be high.
Finder’s fee examples
How do companies utilize finder’s fees in a fair manner – one that benefits the finder, but doesn’t make things too expensive for you or the customer?
Here are some of the most common examples, by industry.
1. Automotive companies
Automotive sales are a good example of the use of a finder’s fee (often called bird-dogging sales by car dealerships). First, you have a large purchase price and a lower frequency of sales. You also often have a salesperson involved at the dealership. Margins are typically thin, and often even compensated by the manufacturer.
Nonetheless, having people out on the streets in locations like a car repair shop or body shop is a great way to generate quality leads. With all the factors to consider, most finder’s fees for automotive sales are bound to a sale and are a flat fee in the amount of $100-$300.
2. Software businesses
In the world of software sales, you’ll often hear about ACV or annual contract value. This is the value assigned to the average revenue of each of your company’s customer contracts, minus one-time fees.
Generally speaking, most software companies pay finder’s fees of around 35-40% for first-year ACVs after receiving closed leads. While this might sound steep, it will likely cost your company much more to acquire and close these leads yourself.
If the partner does the marketing and not the sales, most companies pay percentages of around 15-20% of first-year ACV.
Partners bringing leads without deep qualification processes shouldn’t receive more than around 10% of their first-year ACV.
3. Project-based services
As another type of finder’s fee example, if a project is worth $50,000 in revenue, a reasonable amount to pay in finder’s fee percentages should be 5-10% of the first project. If finder’s fee percentages are too high, the customer will find somebody cheaper.
4. Consultant services
Flat fees with a combination of percentage-based fees are often done with consultants and services. There isn’t a typical finder’s fee for consultants as it varies strongly.
Decide if a finder’s fee is right for you
A finder’s fee won’t work if people aren’t excited about the products and services you offer. A traditional finder’s fee incentivizes someone to share information with their network. But why would they share this information if they didn’t believe in it?
As mentioned by Carol Roth, a contributor to Entrepreneur, “not every lead is worthy of a finder’s fee.” So if there isn’t a good standing relationship with the lead, it may not be worth asking for a fee.
Remember: not only should you provide quality products and services, you also need to give adequate compensation to those who are willing to find customers on your behalf.