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The Ins-and-Outs of Finder’s Fees

 

CurrencyWhen I talk to small business owners, one of the biggest issues that always comes up is how they can find new business.  I believe strongly in utilizing network referrals as a way to get that new business.  And, to make those referrals more concrete and valuable for your network to give or to gain value from your own connections, I also embrace finder’s fees.

I know that I have spent a lot of time building my brand and my network and that they have substantial value. I also recognize that others have too.  And frankly, with the amount of time and effort that it takes to gain new clients and customers, I gladly am willing to pay a finder’s fee for referrals.

So, below are a few things to keep in mind regarding Finder’s Fees.

What is finder-worthy?

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 just met them a minute ago) or if the introduction is more of a lukewarm lead (i.e., one that the other person has to compete substantially for over lengthy periods of time), then asking for a fee may not be appropriate.

Also, if the person you are referring to is a contact that you trade leads with on a regular basis or someone who has brought you business in the past, you may decide to forgo fees.

Should you remain involved?

A typical finder’s fee means just that- that you hand off the lead and you are done.  That being said, it is good form to at least check in and see if you can provide some minor value or assistance.

If you are playing a bigger role, then you may need to reevaluate fees.

Do I need a contract?

Nobody has ever complained about being too clear about agreements upfront.  You don’t need anything substantial, but a one-pager that covers the referral, that you are simply a finder and not going to be involved further, and that details the fee that you have agreed upon should cover your bases.

What’s an appropriate finder’s fee?

This is probably the biggest question that is out there and the answer is “it depends.”  While the value of leads in many industries can span widely and there are benchmarks from 5-35% and higher.  I typically do 15-20% of the net revenue (revenue minus any direct costs) the provider receives if I am not involved at all or just minimally with some upfront strategy.  Sometimes, I do a bit less if I have a strong pre-existing relationship as well.

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 not appropriate for a finder’s fee.  As a side note, I also think it’s generally a good idea to proceed with caution with anything named after a company that is no longer in business.

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, put out the word that you pay finder’s fees and find partners who reciprocate as well as a way to boost your revenue.

Article written by
Carol Roth is a national media personality, ‘recovering’ investment banker, investor, speaker and author of the New York Times bestselling book, The Entrepreneur Equation. She is currently an on-air contributor for the national cable television station CNBC, the pre-eminent name in business news, and the host and co-producer of The Noon Show, a current events talk show on WGN Radio, one of the top stations in the country. Carol multimedia commentary covers business and the economy, current events, politics and pop culture topics. Carol has helped her clients complete more than $2 billion in capital raising and M&A transactions. She is a Top 100 Small Business Influencer (2011 &2012) and has her own action figure. Twitter: @CarolJSRoth
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