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

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

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

Referral Agreements Vs. reseller agreements

It is 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 actively participates in the sales process) to the principal;

* the principal determines the sale price to the customer; Y

* the sale to the client is made between the principal and the client (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 the purpose of resale;

* the reseller determines the sale price to the customer; Y

* the sale to the client is between the reseller and the client.

Referral Agreement Checklist

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

* Define the agency relationship. Indicate that they are independent contractors in a principal and agent relationship, and not an employer and employee, franchisor and franchisee, joint venture, or partner relationship.

* Qualified or unqualified references? Do you just want a list of prospects or are you hoping for qualified referrals? Perhaps it is only understood that you want qualified references. Best practice is not to leave something that important to inference. Get it in writing. If you want qualified references, specify that the references must be qualified and define what this means. Qualification typically involves personal or telephone contact, in addition to full contact information, including the identity and contact information of a decision maker for the referral.

* Commission percentage or specific dollar amount? Most referral deals that require qualified referrals pay commissions based on a specific percentage of income. For prospect lists, commissions are generally paid on a set dollar amount.

* When is the referral commission earned (ie what is the earning period)? One of the most important clauses defines precisely when a commission is earned. This usually involves specifying a profit period. An earning period begins with the date of the referral and continues for a specified period of time. If a sale is made (or a sales contract is concluded) during the waiting period, a commission is earned.

* What is the payment period? The pay period is relevant if the referral engages in repeat business or pays over a period of time. The pay period defines the period in which earnings qualify for commissions. If you do not want to pay commissions forever, you will specify that you will continue to pay commissions on income received from the referral for a specified period of time, after which your obligation to pay commissions will cease.

* Commission payable from what income? You must accurately specify the income from which the commissions will be paid. This typically takes the form of a definition of Net Income, which generally includes monies received less (i) credits and returns, and (ii) any sales-related taxes, fees or duties.

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

* Confidential information. If there is any possibility of a disclosure of confidential information (for example, confidential marketing plans), you must state that all such information is confidential, should be used only in the performance of referral duties, and should not be disclosed without your prior approval. .

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

* Termination for convenience. Termination for convenience means that one of the parties can terminate it before the expiration of the contract term for any or no reason. If you provide termination for convenience, it generally applies to both parties.

* Commission payable after termination. The contract will expire at the end of its term, and may be terminated before the end of the contract for cause or convenience. Generally, you must state that from and after expiration or termination of the agreement for any reason, you will continue to pay commissions you earned prior to expiration or termination. You must also state that this clause will survive expiration or termination.

* Consider arbitration for dispute resolution. It’s usually a good idea to provide an arbitration clause that specifies 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 reference template should be one of your essential tools.

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

Copyright © 2010 Chip Cooper