Every small business should have a referral agreement template. A simple referral agreement will help you get new business in any economy, and particularly in a down economy.

You need a good referral agreement template handy so that when a good opportunity presents itself, you’ll be prepared. You’ll never know in advance when this will happen.

A good referral agreement will have certain essential clauses. This article presents a checklist for the clauses you’ll need.

Referral Agreements vs. Reseller Agreements

It’s important to understand the nature of the referral relationship and how it contrasts with the reseller relationship.

Referral agreements are based on a principal and agent relationship:

* the agent refers prospects (and in some cases is actively involved in the sales process) to the principal;

* the principal determines the selling price to the customer; and

* the customer sale is made between the principal and the customer (the principal pays a commission to the agent for procuring the sale).

Reseller agreements are based on a principal and reseller relationship:

* the reseller purchases the principal’s products or services for purposes of resale;

* the reseller determines the selling price to the customer; and

* the customer sale is between the reseller and the customer.

Referral Agreement Checklist

This checklist is not exhaustive, but it should provide a good start for a simple referral agreement.

* Define the agency relationship. State that you’re independent contractors in a principal and agent relationship, and not a relationship of employer and employee, franchisor and franchisee, joint ventures, or partners.

* Qualified or unqualified referrals? Do you want just a prospect list, or do you expect qualified referrals? Maybe it’s just understood that you want qualified referrals. The best practice is to not leave something this important to inference. Get it in writing. If you want qualified referrals, specify that referrals must be qualified and define what this means. Typically, qualification involves personal or telephone contact, plus complete contact information including the identity and contact information for a decision maker for the referral.

* Percentage commission or specified dollar amount? Most referral agreements that require qualified referrals pay commissions based on a specified percentage of revenues. For prospect lists, commissions are usually paid on a stated dollar amount.

* When is the referral commission earned (i.e. what is the earn-out period)? One of the most important clauses defines precisely when a commission is earned. Usually, this involves specifying an earn-out period. An earn-out period begins with the date of the referral and continues for a specified period of time. If a sale is made (or if a contract for sale is entered into) during the ear-out period, then a commission is earned.

* What is the pay-out period? The pay-out period is relevant if there the referral engages in repeat business or pays over a period of time. The pay-out period defines the period in which revenues qualify for commissions. If you don’t want to pay commissions forever, you’ll specify that you’ll continue to pay commissions on revenues received from the referral for a specified period of time, after which your obligation to pay commissions will cease.

* Commission payable out of which revenues? You should specify precisely the revenues from which commissions will be payable. This usually takes the form of a definition for Net Revenues, which typically include monies received less (i) credits and returns, and (ii) any taxes, duties, or tariffs relating to the sale.

* Resolution of commission conflicts. If you have (or may have) multiple referral agreements, it’s a good idea to specify how to resolve conflicts regarding referrals. Typically, you would provide that you would exercise reasonable efforts to resolve any conflicts, but you also should consider providing that your determination is final.

* Confidential information. If there is any possibility that there will be a disclosure of confidential information (e.g. confidential marketing plans), you should provide that all such information is confidential, it should be used only in the performance of referral obligations, and it should not be disclosed without your prior approval.

* Limitation of liability. You should limit your liability to commissions payable. You should also provide that this clause will survive expiration or termination.

* Termination for convenience. Termination for convenience means that a party can terminate prior to the expiration of the term of the agreement for any reason or no reason. If you provide for termination for convenience, it typically applies to both parties.

* Commissions payable after termination. The agreement will expire at the end of its term, and it may terminate prior to the end of the term for cause or convenience. Typically, you should provide that from and after the expiration or termination of the agreement for any reason, you’ll continue to pay commissions commission that were earned prior to expiration or termination. You should also provide that this clause will survive expiration or termination.

* Consider arbitration for dispute resolution. It’s usually a good idea to provide an arbitration clause specifying that all disputes will be arbitrated. You probably don’t want to risk the expense of litigation.

Conclusion

A simple referral agreement can be a very effective tool for business development in any economy. To be prepared for every opportunity, a good referral template should be one of your essential tools.

This article is provided for educational and informative purposes only. This information does not constitute legal advice, and should not be construed as such.

Copyright © 2010 Chip Cooper