A referral agreement is entered between a supplier/service provider and another company that refers potential clients to the supplier/service provider. It is used primarily when people have business contacts in a certain industry and receive a “Referral Fee’ for making a successful introduction to others. It is also referred to as a business introduction agreement.
Once successfully referred, the company receives a commission or referral fee from the supplier/service provider. Most businesses will utilise referrals to gain more consumers/clients, therefore, it is important to formalise this process to reduce issues that may come up in the future.
The parties may also enter into a Mutual Referral Agreement whereby each party refers potential clients to the other in exchange for a commission/referral fee.
What to include in a Referral Agreement?
- Relationship between the parties
It is important to define the relationship between the parties as an agreement between independent contractors i.e. where you’re the principal and the referral is an agent.
- Referral Process
The parties must agree on the procedure for making a referral. For instance, the parties may decide that the details of the referral must be provided by e-mail. Also, you can define what constitutes a valid referral as every business lead might not generate revenue.
Example: Allen runs an online membership service and offers a referral program for members if they successfully refer another potential member to sign up. For Allen, the referral may be valid once the potential member signs up and pays the membership fee. If there is a trial period, Allen may then pay the referral fee to the referral party after the period is over.
- Whether the referral will be qualified or unqualified?
A qualified referral is where the referrer evaluates and investigates the business leaders before they refer them to you. This ensures that the referral is valid and viable.
While an unqualified referral is not as ‘qualified’ and the referral can be given by simply providing a name or phone number. It isn’t certain that the contact information given will convert into revenue. Unqualified referrals are more like a list of potential prospects.
Thus, if you require only qualified referrals, then it should be clearly stated in the agreement.
- Referral Fee
The method for calculating the referral fee should be specified in the agreement. Usually, it is either a percentage of commission per referral or a fixed amount per referral. The medium of payment should also be clearly stated depending on the preferred business practice. For example, for the payment to be paid either through check or cash.
- Payment Date
Set out when the commission will be due and payable to the other party. Generally, the commission is paid after the referral is successful and usually the amount is credited only after some time, for example after 30 days.
Example: If the service being referred to offers a money-back guarantee or trial period, the payment period will vary and the payments will generally occur after the trial period ends.
- Exclusivity
An exclusivity clause can prevent either party from entering into similar business arrangements with a competitor. For instance, if you include an exclusivity clause in the agreement, this will stop the referral party from entering into other similar referral agreements with another business.
- Intellectual Property Clause
The referral party may want to use your company’s logo on a website or social media to drive more referrals. This clause enables you to grant a license to use your intellectual property and ensures they don’t infringe your IP rights in the process.
- Confidentiality and Privacy
When a customer/client is referred, it involves the transfer of the personal information of such customer/client. Therefore, the agreement should provide for a confidentiality and privacy clause that outlines how the parties will handle the referral information, such as names and birth dates, and ensure compliance with The Personal Data (Privacy) Ordinance (“PDPO”) in Hong Kong.
For instance, If you are in the business of giving referrals to a supplier/service provider, then you must inform the customers that their data will be transferred to third parties and obtain consent in compliance with the PDPO.
Key Takeaways
- A referral agreement is between two businesses, and one party refers customers to the other party in return for a referral fee (compensation) and outlines the referral process in the agreement
- It is helpful for a startup to formalize the process of receiving referrals of clients/customers from another business.
- Before signing a referral agreement, check whether it is a qualified/unqualified referral, what constitutes a valid referral and when the payments are due to the other party.