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We all want to have a continuous flow of customers and clients coming into our businesses but are sometimes unsure of how to do it. How can we ensure there’s a constant flow? A finder’s fee or commission can help establish a network of people that refer your business.
But how do you establish the right type of finder’s fee percentage? We’ll show you how.
What’s a finder’s fee?
What exactly is a finder’s fee? A finder’s fee is a type of commission paid to the coordinator in a transaction. Companies of all sizes, from small businesses to large corporations, pay these types of fees. Sometimes, it’s for just the business introduction. But it’s often tied directly to a sale. You might also hear this type of fee referred to as a referral fee.
So how does this type of fee work?
When your finders hunt down new business, you’ll have new connections you may have not had access to previously. After your business is able to qualify that this is either a qualified lead or someone who makes a verified purchase, you reward the person who brought you this lead.
To make this process easier, most companies use some type of tracking software and service to confirm that the quality of leads and the path they took to get to your company’s website.
It’s understandable to wonder what makes certain company’s finder’s fee process work better than others. The best way to ensure your finder’s fee process works well is by offering quality products and services. It’s also a good idea to ensure there’s lots of buzz around your company. You can then go ahead and give incentives on top of that for even greater success.
Who pays this fee?
Usually, the party who initiates the process pays the fee. This means that, in most cases, the company that created the finder’s fee agreement will be paying these costs to intermediaries. With that said, these costs are sometimes factored into a product or service’s purchase. In this case, it would be the buyer that technically pays the finder’s fee.
There’s also third-party software you can use to help track and automate finder’s fee financing.
Are these fees legal?
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.
You should also be aware of the tax implications of these fees for businesses. The amount of fees paid to an individual in excess of $600 in a calendar year are subject to taxes by the recipient. It’s your responsibility to collect a W-9 form and issue a 1099 when you are paying more than $600 in a calendar year.
Another consideration for the tax element is that if it’s a previous customer who is referring your business (like a customer or refer a friend program) 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.
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 reward them for a job well done.
These programs foster a sense of community and involvement with employees and keep clients excited about your business. This type of fee also saves you time by tasking others with tracking down new prospects utilizing their locations and relationships.
Perhaps the greatest benefit of enacting finder’s fees is that you have nothing to lose. Customarily, you only pay if the finder actually generates new clients. That’s a far cry from the risky investment of an expensively paid company advertisement that could go unnoticed for the duration of the campaign.
What is the standard percentage for this type of fee?
We cannot say that standard finder’s fee percentages exist. You’ll find that finder’s fees vary by industry and even by company. There are quite a number of factors to consider when determining this type of percentage. Here are three tips to remember while working on this part of your finder’s fee plan.
As we mentioned above, there are many variables that weigh into calculating the ideal finder’s fee. Normally it varies, and what’s paid is subject to negotiation and agreement. You can also promote it as open to negotiation, so you can find the market value of your finder’s fee.
Also, keep in mind it does NOT have to be a percentage. A flat fee often works well, especially if margins are thin and you may have to pay a salesperson as well.
Factors to think about when determining finder’s fee percentages
There are no standard finder’s fee percentages. When figuring out a finder’s fee percentage, there are multiple things to consider:
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 does it count as a sale for the referring party? Within one month? six months? How long should you consider this lead/sale as coming from the referring party?
3. When and how do 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!
What is a finder’s fee agreement and what’s in it?
A finder’s fee agreement is a formal agreement binding the finder and the business owner, and in which the formal agreement details are outlined. It’s up to you whether you want to outline a formal agreement or not. There are many templates out there but most of them 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.
- Compensation or finder’s fee: Many ways to calculate the fees. (see our other sections above)
- Fee schedules: When and how you’ll pay. Don’t forget to consider returns/refunds policies.
The agreement involves your money, there are a few things that can go wrong with your finder’s fee agreement. So it is worth the time upfront to come up with an agreement, especially since the money involved can be high.
Companies that pay finder’s fees
As one 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. Here are some more examples of how companies utilize these types of percentages in a fair manner.
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 finder’s fee 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. Consultants and 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.
This type of 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.