Given that business growth is often via new customers and that finding new customers is a big component of that, turning to your network can be a great source of small introductions and big deals.
If you want to enhance getting such referrals, or perhaps if you have a strong network to be monetized, you may want to formalize giving or getting finder’s fees. However, the structuring of finder’s fees is both an art and a science. Here are some things to keep in mind to make your referrals and finder fee initiatives more successful.
What is the opportunity?
I am usually happy to pay a finder’s fee if it’s a business that I would not have been able to get to on my own and the nature of the finder’s relationship adds significant value to my business. I also request finder’s fees in the opposite capacity.
However, not every lead is worthy of a finder’s fee. If there isn’t a substantial pre-existing relationship with the lead (i.e., you don’t have a strong or long-term relationship) or if the introduction is more of a lukewarm lead (i.e., a non-exclusive introduction or one that the party being introduced has to compete substantially for over lengthy periods of time), then asking for a fee may not be appropriate. I also often don’t ask for a fee if the value of the customer or deal isn’t that substantial in size.
Also, if the person you are referring to or who gave you a particular lead is a contact that you trade leads with on a regular basis or someone who has brought business to you in the past, you may decide to forgo fees and instead just engage in doing your best to send each other business on a go-forward basis.
You further need to consider whether the person who is providing the lead is a finder or deal maker as a part of their businesses. If they regularly get compensated for being a finder or deal maker, this sets up more of a case to compensate that someone who does not usually get compensated in such capacity.
Additionally, if it’s a relationship where they won’t accept a finder’s fee or it’s not appropriate, consider sending a small token of your appreciation when you receive payment from your new client or customer, such as a gift card, as a way to acknowledge and appreciate the referral.
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What is your role?
The reality is that a deal usually has many steps, ranging from identifying many leads to contacting them to putting together materials to structuring and negotiating a deal. A typical “finder’s fee” means you hand-off the lead and you are done, so you are only providing partial value to the process. That being said, there are instances where it makes sense to check-in and see if you can provide some minor value or assistance.
The bigger your role and the more value you add should be reflected on both sides.
Put it in writing
Being very clear about agreements upfront almost always serves both parties well. You can keep it simple, but be clear on role (if it’s just an introduction or if there is more work being done), whether the introduction covers one specific project or all projects over a period of time and how fees are calculated.
Calculating the finder’s fee
The question I get asked more than any is “what’s an appropriate finder’s fee?” My answer: “it depends.”
While the value of leads in many industries can span widely, there are benchmarks from 5-35% and higher. For a customer-based introduction, I typically do 10-20% of the net revenue (revenue minus any direct costs) that the provider receives if I am not involved at all or just minimally with some upfront strategy. Sometimes, I ask for a bit less if I have a strong pre-existing relationship, as well.
If it is a deal-based finder fee, I would typically ask for 10-20% of the fees an investment banker would charge for the transaction. So, if they charged a 5% fee, my fee would be 10-20% of that.
There are many that suggest using the “Lehman formula” as a benchmark. In my opinion, that formula is meant to determine the payment schedules for M&A business advisors for significant transactions and is not appropriate for a finder’s fee. You would only, as noted above, get a fraction of that for being the finder. As a side note, I also think that it’s generally a good idea to proceed with caution with anything named after a company that is no longer in business!
In addition to the percentage charged, you need to figure out what to base it off of and for what time period. For a customer-fee, as noted above, I based it off of the net revenue they receive, usually over just a couple of years, as it’s very cumbersome to keep track of that indefinitely, and while being a finder has value, it’s not invaluable, so to speak.
The bottom line is that both parties need to feel comfortable that the fee reflects the value of the referring person’s brand and is an appropriate amount for the receiving person to spend for what is, in effect, a sales lead.
So, whether you want to be paid as a finder or use them to grow your own business, be clear and thoughtful with the above advice for guidance – and remember there’s never a wrong time to be helpful to someone else.
About Carol Roth
Carol Roth is the creator of the Future File™ legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including host of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness.
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