How Finder's Fees Can Be a Catalyst for Business Growth

One of best ways to find new customers and clients is through your own network. Here's what you need to know about charging and paying finder's fees for referrals.

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By Carol Roth

Opinions expressed by Entrepreneur contributors are their own.

One of the biggest challenges that small-business owners face is finding new customers and clients. One of best ways to find new customers and clients is through your own network.

To accelerate the rate of receiving referrals, make referring valuable for your network.

Likewise, generating additional fees from the time that you have invested into your company, brand and network can be valuable, too.

Because of the amount of time and effort that it takes to gain new clients and customers, it has substantial value and I am gladly willing to pay a finder's fee for referrals.

Here are a few things to keep in mind to make referrals and finder's fees successful for your own business.

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Is an opportunity finder-worthy?

Not every lead is worthy of a finder's fee. If there isn't a substantial pre-existing relationship with the lead (say you just met them a minute ago) or if the introduction is more of a lukewarm lead (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 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.

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.

Will your involvement be ongoing?

A typical finder's fee means just that -- that you hand off the lead and you are done. That being said, there are instances where it makes sense to 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.

To contract or not to contract?

Being clear about agreements up front usually serves parties well. 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.

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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, there are benchmarks from 5 percent to 35 percent and higher.

I typically do 10 percent to 20 percent 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.

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. 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.

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.

Let your customers do the talking.

If you are a B2C-focused business, you can also spread the referral love to your customers by offering some kind of payment or reward for making referrals to new customers. Companies such as PayPal, Uber and Spotify have built a large part of their customer base through rewarding referring customers. There are a wide variety of affiliate and referral technology providers, such as Extole, Tune, Amplifinity and more that specialize in creating the technology solutions to help make these referrals easy to track and manage.

So, put out the word that you pay finder's fees and find partners who reciprocate as well as a way to grow your business.

Related: Why Smart People Make Bad Entrepreneurs

Carol Roth

Entrepreneur, TV host and small business expert

Carol Roth is the creator of the Future File™ legacy planning system, a “recovering” investment banker, business advisor, entrepreneur and best-selling author. She is also a reality TV show judge, media contributor and host of Microsoft’s Office Small Business Academy. A small business expert, Roth has worked with companies of all sizes on everything from strategy to content creation and marketing to raising capital. She’s been a public company director and invests in mid-stage companies, as well.

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