Referral Agreements – 4 terms you should know
When you want to pay someone outside your company for referring business to you, it’s good business practice, as is usually the case, to have a written agreement in place. The Referral Agreement will describe which referrals will be covered (you don’t want to pay, for example, for clients that you already have a relationship with) and how payment will work. Though referral business is often done without a contract, with a simple level of formality, you can add clarity to the terms of the relationship and avoid problems.
Here are 4 terms of Referral Agreements you should know:
1. Compensation for the referrals
You’ll want to set the compensation your company will pay someone for a referral. This can be a percentage of the gross revenue received under the referred client contract or a fixed payment. You will also want to identify when your company will pay the referral fee. Is it up front when the client contract is signed? Or over time as you collect payment from the client? Importantly, you need to make it clear that the referral fee applies only if the customer comes to you initially and exclusively from the referrer.
When someone other than you is talking to potential clients about your company and services, you need to be certain that all legally binding statements regarding your work and contractual commitments are ultimately made by you or other authorized members of the company. The Referral Agreement should include provisions that address these issues by clarifying the limited scope of authority granted to the referring party.
3. Ownership of client relationships
Even though you might receive referrals for customers that are qualified for your company’s services, your company should always have the exclusive right to determine whether to do business with the client and the terms of any client relationship and to assert your ownership (and not the referring party’s) of the client relationship after the referral is made.
4. Indemnification to protect your company
To cover against violations of authority and other improper acts of the referring party, the Referral Agreement should include indemnification provisions that obligate the referring party to cover the cost of claims and damages against your LLC arising out of such matters.