Decoding the Difference: Finder’s Fees vs Referral Fees

In the world of sales and marketing you may come across the terms “finder’s fee” and “referral fee”. Both refer to payments made to a third party for bringing in business but they have some key differences. In this article, I’ll explain what each entails and when it’s appropriate to use one versus the other.

As a sales consultant with over 10 years of experience, I’ve helped many clients successfully utilize finder’s fees and referral fees to grow revenue. Read on for a full breakdown of these two types of incentives so you can determine which strategy is right for your business.

What is a Referral Fee?

A referral fee is a commission paid by a business to someone who refers a new customer or client. For example:

• A real estate agent offers a $500 referral bonus to anyone who recommends a client that successfully buys or sells a home through them.

• An insurance agency pays 10% of the first year’s premium to individuals who refer new customers that purchase policies

• An affiliate marketer receives a percentage of any sales they drive to an online retailer by promoting links,

Referral fees are typically paid only after the referred customer makes a purchase or completes a transaction. They provide an incentive for others to actively recommend your business to their own networks.

When are Referral Fees Used?

Referral fees are commonly used in:

• Service businesses – Such as real estate, financial services, healthcare, attorneys, travel agents, and more.

• Product companies – Both physical and digital products – from clothing brands to SaaS tools.

• Online affiliate and influencer marketing – Paying commissions for sales driven by links and promos.

The main goal is to gain new long-term, loyal customers. So referral fees make most sense for businesses selling ongoing services, subscriptions, or frequently purchased consumer products.

What is a Finder’s Fee?

A finder’s fee is paid to someone who connects two parties to facilitate a specific business transaction. For example:

• An M&A advisor receives a finder’s fee for introducing a company looking to acquire a new business to a potential target.

• A business broker earns a finder’s fee for connecting sellers and buyers to broker acquisition deals.

• A commercial real estate agent gets a finder’s fee for discovering a property and bringing together purchasers and sellers.

Unlike referral fees, finders fees are typically paid after the transaction closes and are based on the total value of the deal. The finder acts as an intermediary between parties that may otherwise never have connected.

When are Finder’s Fees Used?

Finder’s fees are most commonly used for:

• Mergers and acquisitions – Both buy-side and sell-side intermediaries can earn fees for connecting acquiring and target companies.

• Commercial real estate deals – For finding and facilitating sales of office buildings, retail spaces, apartments, land, etc.

• Investment opportunities – Introducing investors to emerging companies or assets needing funding.

• Lending – Connecting borrowers and lenders for various financing needs.

Essentially, finder’s fees incentivize the discovery and mediation of major business transactions between two parties that may not have found each other otherwise.

Key Differences Between Referral Fees and Finders Fees

While both provide monetary incentives, referral fees and finder’s fees have distinct differences:

Purpose

• Referral Fee – Compensates referring new clients/customers to a business.

• Finder’s Fee – Compensates discovering and connecting parties for a transaction.

Timing

• Referral Fee – Paid after customer makes a purchase.

• Finder’s Fee – Paid after transaction completes.

Payment Basis

• Referral Fee – Set amount or percentage of customer’s spend.

• Finder’s Fee – Percentage of total transaction value.

Parties Involved

• Referral Fee – Two parties (business and referrer).

• Finder’s Fee – Three parties (transacting parties and finder).

Transaction Type

• Referral Fee – Ongoing sales of products/services.

• Finder’s Fee – One-off transactions and deals.

Industries

• Referral Fees – Common across many industries.

• Finder’s Fees – Concentrated in major transactions.

Amount

• Referral Fees – Tend to be smaller amounts.

• Finder’s Fees – Can be very large for major deals.

Typical Finder’s Fee Rates

Unlike referral fees, there are no fixed standards for finder’s fee percentages across industries. Rates often range from 1% to 10%, based on factors like:

• Deal complexity – More intricate deals warrant higher fees.

• Transaction value – Fees generally increase for larger transactions.

• Industry norms – Some sectors have more established standards than others.

• Finder’s role – More active mediation deserves higher compensation.

• Finder’s qualifications – Experienced professionals can command larger fees.

• Geographic region – Fee rates can shift based on local standards and regulations.

Generally, you can expect finder’s fees in the range of:

• 1% to 4% – For deals up to $5 million.

• 2% to 5% – For transactions of $5 million to $50 million.

• 4% to 8% – For deals over $50 million.

However, fees are ultimately negotiable between the transacting parties and the finder. There should be a written agreement upfront clearly defining the terms and conditions.

Structuring a Referral Fee Program

If you decide a referral fee program could benefit your business, here are some best practices to consider:

• Set clear guidelines – Define who qualifies, referral requirements, and payment terms.

• Offer tiered rewards – Increase referral bonuses for higher value clients or after volume milestones.

• Promote the program – Get the word out through social media, email, account managers, and your website.

• Make it easy to refer – Provide a referral submission form and sales assets to support advocates.

• Show appreciation – Send thank you notes or small gifts to top referrers.

• Track performance – Use UTM links and referral codes to quantify results.

• Optimize over time – Adjust incentives, targeting, and messaging based on response.

Taking the time to strategically design your referral fee program will maximize its impact and return on investment.

Key Steps in a Finder’s Fee Agreement

Before initiating any finder’s fee arrangement, it’s essential to document the terms in a written agreement between the transacting parties and the finder. Be sure to outline:

• Contact information – Names and details of all parties involved.

• Description of services – An overview of the finder’s role and the transaction.

• Compensation – The fee percentage, payment structure, and when it will be paid.

• Exclusivity – Any exclusive or non-exclusive clauses regulating the finder’s work.

• Confidentiality – Requirements regarding privacy, non-disclosure, and use of confidential data.

• Term and termination – Length of the agreement and conditions for ending the relationship.

• Dispute resolution – Process for resolving any disagreements related to the agreement.

• Governing law – Jurisdiction that oversees the agreement.

• Signatures – Signatures of all involved parties, demonstrating consent and understanding.

Having an experienced attorney draft your finder’s fee agreement can help avoid any miscommunication or unnecessary risks down the road.

Leveraging Referrals and Finders for Business Growth

Overall, referral fees and finder’s fees can be extremely effective strategies for increasing sales, profits, and new business opportunities. Just be sure to choose the right approach for your specific business needs.

For recurring revenue through new customer acquisition, a defined referral fee program delivers great ROI. To enable high-value transactions between parties who would unlikely connect otherwise, a finder’s fee arrangement offers compelling incentives.