It’s always great when companies form mutually beneficial partnerships. You know, you scratch their back, and they scratch yours–every party wins! The involved parties may enter this agreement formally or develop the relationship in how they conduct themselves over time.
No matter how your referral relationship was formed, the collaboration can sometimes cause operational headaches. This could occur if you don’t have a formal agreement that outlines when and how you’ll avail your backs for scratching and the value of a scratch. But a referral agreement can be invaluable for both companies.
Like most contracts, writing one isn’t as cut and dry. Fortunately, this comprehensive guide will guide you appropriately, taking you through:
- The definition of a referral contract or agreement
- Why you need the document
- When the agreement can come through for your company
- How to structure the paper
- A few practical tips to guide your writing
What Is a Referral Agreement?
A referral agreement is commonly referred to as a referral fee agreement or referral partnership agreement.
This written legal contract establishes a joint venture between a product or service provider and a referral party that benefits through commission earnings. It indicates the referral party’s agreement to refer clients to the primary company and earn a referral fee in exchange. Partners must read and understand the agreement and sign it to form a legal referral relationship.
The document states all the terms and conditions of this agreement, including the governing law relevant to the payment of the referral commission. This commission is based on the finalized sales by the product or service provider. It’s intended to motivate the referral party to refer potential clients to the primary company, hoping they turn out as leads, regular customers, or even business partners.
Finally, the document can also mention intellectual property rights. Therefore, it must be well-written to cover all the aspects of your relationship and include terms that meet what both parties desire.
Why Should You Have a Referral Fee Agreement?
There’s no piece of state or federal legislation governing how referral relationships between businesses operate. Instead, referral commission agreements can serve as the contract at law under the regulation of the general contract law.
Still, companies in some industries or specializations are subject to disclosure obligations.
There are many reasons to come up with a referral fee agreement, including:
Defining The Terms of Your Relationship
A referral fee agreement outlines the essential terms for the relationship with your referral party. Consequently, either partner will know what to expect.
The document outlines the duties of each party, so it holds both partners accountable for fulfilling their respective roles.
Keeping Your Partner Informed
It informs the referral partner about the commission or referral pricing on offer and what they must do to meet the earning threshold.
Protecting Your Business
The referral fee contract will protect your company from harm or reputation damage if you encounter an unethical partner.
When to Use a Referral Agreement?
Generally, you should use this document whenever you want to create a formalized referral partnership. This business relationship is classified under channel partner relationships, and a written contract must govern every channel partnership.
A referral agreement can come through for your business in many situations. For instance, if you’re a small or medium-sized entity, you can use these agreements to enter new markets or reach new leads. You may also encounter the contract if your entity specializes in real estate, law, or any other field that mainly relies on referrals.
While the areas and situations calling for a referral agreement are vast, you cannot use this document in a traditional or informal referral program where a customer submits their friends’ and family members’ details and gets rewarded when they purchase.
What Should Be Included in A Referral Agreement?
An excellent referral agreement template must include the following sections:
A successful referral partnership requires both parties to be on the same page, but this isn’t possible if the document contains complex legalese that makes it hard to understand. To beat this, always begin with defining special clauses spread throughout the entire agreement. For instance, you should elaborate on terms like “referral fee” or “referral partner.”
Relationship Between Parties
“Good boundaries, good neighbors.”
The second section of your referral agreement should define the nature of your partner relationship.
Generally, your referral partner should successfully refer a peer to your company, and you’ll pay them a referral fee. The section also establishes that the partner isn’t your company employee but serves as an independent contractor.
Every partner has a role within the relationship, and this section highlights each party’s responsibility to prevent conflicts of law. For instance, the partner’s role is to refer to your company to as many suitable prospects as possible.
This section must also highlight your brand’s responsibility in the relationship. Will you train them on your brand? Will you offer branded marketing materials? Remember to be concise and detailed.
Finally, you must state the value your referral partner will gain from your company in return for their effort. For instance, you may also refer clients to their business or offer educational opportunities.
Referral Fee Terms
The agreement should establish the exact amount a partner will earn for each successful referral and detail the formula for calculating the referral fee, including the goals and metrics used. This is mostly in cash, but some agreements mention store credits. You must also define a successful referral, whether it’s a complete purchase or a qualified lead.
This section will also define the fee payment period: Do you issue it as a cumulative, monthly amount or immediately? Finally, mention any added structures or bonuses to motivate referral partners. For instance, you may assure them of a fee increment after hitting a referral goal or a tangible reward for a given number of referrals.
Your partner should know your company’s expectations when promoting your product or service. This section serves that particular purpose.
For instance, you may inform them of the best messaging to use and the kind of information to share that makes your offering stand out. They should also be aware of your brand’s target audience to share your brand message with. Also, mention whether they should only refer clients with whom they’ve already established a relationship.
Prior written consent can prevent misrepresentation, usually by mentioning what the partner isn’t allowed to say about the product or any promotional methods they should avoid.
Referral Process and Tracking
An excellent referral agreement sample must set out how the company expects the referral to occur. This clause will state the exact method of submitting referrals to enable proper tracking and efficient distribution of earned rewards. Furthermore, your partner should know how your business tracks referrals.
Your referral partner is independent of your brand, so the terms of this agreement must allow you to agree with them on their relationships with other partners. Are they free to partner with other companies?
Notably, you can also include a term prohibiting them from working with a direct competitor.
Non-Disclosure and Confidentiality
Referral partnerships involve the exchange of customer and business data, so confidentiality is a priority. This section of the contract will require you and your partner to agree not to disclose any trade secrets or confidential information like contacts or email addresses to any other party. Your referral agreement should also align with your industry’s privacy laws or state regulations.
Cancelation of The Contract by The Partner
Despite an effective date, most referral partnerships have indefinite lengths, intended to last until the primary company or its partner cancels the agreement. This makes things more flexible for the referral company.
This section will mention the legitimate reasons for your partner to terminate the contract. You’ll also clarify how far in advance they should notify you of their decision to cancel your agreement.
A sample referral fee agreement must also mention what can make you, the service or product provider, terminate the contract. Talk about the problematic or unethical behavior on your partner’s side qualify as grounds for immediate cancelation of your partnership.
Other Legal Terms
The final clause will define other relevant legal terms of your referral partnership.
For instance, mention that your partner must report to the IRs if they earn more than $600 in referral fees. You may also cover the legal process after a breach of contract and include an indemnification clause stating that you’ll cover your partner’s expenses if they encounter external legal issues. This will protect your company from liability resulting from your partner’s actions and the consequential damages.
Finally, you’ll remind your partners to comply with any applicable law, whether it’s at the federal or state level.
Referral Agreement Tips
Pay attention to the following tips to get it right with your referral agreement:
- Ensure you discuss the agreement one-on-one or via a Zoom meeting and answer any of their questions.
- Be transparent when discussing the importance of all the sections to your partnership.
- Remember to mention what’s in it for your referral partner in the contract.
- Be specific with the terms of your agreement, especially the referral fee or commission structure.
The Bottom Line
A referral agreement is crucial if you transact with referral companies. Therefore, you must draft it properly or spend more energy and time negotiating and editing it until it precisely represents the deal you’re entering into with your referral partner. Fortunately, the above tips will guide you aptly.