What Is Finder’s Fee?
Finder’s fees refer to a commission given to anyone who helps facilitate a business meet its customers instead of one-time monetary compensation. This fee compensates an individual or entity for facilitating a business transaction by connecting a buyer with a seller or vice versa.
The Finder’s fees typically connect to a sale transaction between two parties. Furthermore, the seller or buyer may charge the fees as either a fixed amount or a percentage of the deal’s value. Therefore, this process facilitates a deal between two parties, allowing them to meet and conduct business.
Table of contents
- A finder’s fee is a commission or payment given to an individual or entity that successfully introduces a buyer or a seller to a business transaction.
- It allows businesses or individuals to connect to customers who would otherwise not know of the product or service and may never have bought these, adding a new source of revenue to the seller.
- Referral, finder’s fee, and commission differ because referral does not include a written agreement, finder’s fee has an agreement specified by the government, and commission is based on a contract between the agent and the business.
Finder’s Fee Explained
A finder’s fee is a compensation paid to an individual or entity for successfully connecting two parties involved in a business transaction. Hence, it enables the seller or a buyer to connect quickly and gain for each other in place of a small fee to the finder.
Individuals and large firms also get finder’s fee by referring customers to large firms. Some even have modeled their business on the referral business to earn substantial referral fees.
Furthermore, finder’s fee businesses can operate in various sectors, including real estate, business brokerage, consulting, and more. Besides, the success of such a business often relies on the finder’s ability to match parties effectively and the trust established within the network. However, the finder’s fee amount is not fixed and can vary based on several factors. Parties negotiate the finder’s fee, and there is no standard or universal percentage or amount for it.
Here’s a breakdown of how a finder’s fee works:
- The finder identifies an opportunity where two parties could benefit from engaging in a business transaction.
- Then, the finder facilitates the initial contact between the parties. Hence, this might involve introducing information between the buyer and the seller.
- If the introduced parties finalize a transaction, the finder is entitled to receive a finder’s fee as compensation for actively bringing the parties together.
- Before making any introductions, the parties typically execute a formal agreement or contract that outlines the terms of the finder’s fee.
- After completing the transaction, individuals make payments. Thus, the payment could be a fixed amount, a percentage of the transaction value, or another agreed-upon arrangement.
- Hence, parties typically document the terms of the finder’s fee arrangement in writing to avoid misunderstandings.
Let us check the example below to understand its concept.
Let’s imagine Baker Tilly Digital Corporation, a technology firm, entering into a finder’s fee agreement with Jane Doe, an independent business consultant. Jane actively identifies and introduces potential clients interested in this Corporation’s software solutions in this arrangement. Consequently, the Corporation pays her a finder’s fee, set at 5% of the gross revenue generated from any contracts resulting from her referrals, within 30 days of closing each transaction.
Moreover, the agreement stipulates that Jane must maintain the confidentiality of all proprietary information the Corporation shares. Besides, the agreement term is one year, with either party having the right to terminate with 30 days’ notice. Both parties agree that the laws of the state shall govern the agreement. Therefore, this arrangement ensures compensation for Jane’s efforts in facilitating valuable business connections for the technology corporation while safeguarding the confidentiality of sensitive business information.
On September 23, 2033, Tevano Systems Holdings Inc., a technology company focused on sustainable energy solutions, and ZAAP Charge Inc. (“ZAAP Charge”) announced that they have signed a Letter of Intent (LOI) to explore a potential strategic alliance to transform the electric vehicle (EV) charging market. Therefore, in partnership with installation partners, ZAAP Charge Inc. is famous for its fast-charging solutions that increase effectiveness and dependability.
According to the LOI, Tevano Systems will acquire 100% of ZAAP Charge in an arm’s length transaction for 37.5 million common shares with a presumed value of 0.5 cents per share. The finders participating in the transaction will also receive a finder’s fee of 3.75 million shares at arm’s length and a presumed value of 0.5 cents per share. Tevano Systems will also provide ZAAP Charge one a seat on the board of directors (BOD) and $100,000 in working capital to cover audit costs and expedite the introduction of the M2 machine to Canada, allowing for quick revenue generation.
Finder’s Fee Agreement Template
Usually, a business establishes a written agreement with the finder concerning compensation, terms, and conditions in the event of a referral of a potential client. A written agreement keeps payout transparency and eliminates any future misunderstanding or lawsuit. Hence, the government of the US has prepared a format for these fees. Therefore, let us have a look at the template of finder’s fee contract below:
[Company Name] [Company Address] [City, State, Zip Code] [Date]
[Client/Business Name] [Client/Business Address] [City, State, Zip Code]
Dear [Client/Business Name],
This Finder’s Fee Agreement (the “Agreement”) is made and entered into as of [Date] (the “Effective Date”) by and between [Company Name], a [State] corporation, with its principal place of business at [ Company Address] (the “Finder”), and [Client/Business Name], a [State] corporation, with its principal place of business at [Client/Business Address] (the “Client”).
- Engagement of Finder: The Client engages the Finder to [provide a brief description of the services or introductions the Finder will perform].
- Compensation: Considering the services provided by the Finder, the Client agrees to pay the Finder a finder’s fee of [percentage or amount] of any revenue generated from transactions with clients introduced by the Finder. Payment will be made within [number] days of the close of each transaction.
- Duration of Agreement: This Agreement will commence on the Effective Date and will remain in effect until terminated by either party with [number] days’ written notice.
- Confidentiality: The Finder agrees to keep confidential any proprietary or sensitive information the Client provides.
- Independent Contractor Status: The Finder is an independent contractor and is not an employee, partner, or agent of the Client.
- Governing Law: This Agreement shall be governed by and construed by the laws of the State of [State].
- Amendments: This Agreement may be amended only in writing and signed by both parties.
IN WITNESS WHEREOF, the parties hereto have executed this Finder’s Fee Agreement as of the Effective Date first above written.
[Your Company Name] [Client/Business Name] By: ________________________ By: ________________________ [Your Name, Title] [Client/Business Representative, Title]
Date: ________________________ Date: ________________________
[Notary acknowledgment, if required]
Finder’s Fee vs Referral fee vs Commission
Here are the main differences between the three:
|It means a fee given to a person facilitating the sales without negotiating with any party.
|A referral fee means a person refers a product or service to the buyer.
|Commission means a person negotiating selling a product on behalf of either seller or buyer.
|These fees are decided by the product or service provider at their discretion, either in cash or in kind.
|These fees get decided by the product or service provider at their discretion, either in cash or in kind.
|Here, it varies from person to person and industry to industry and depends on the amount of effort of the agent involved.
|Moreover, they must follow the finder’s agreement stipulated by the US government.
|This could be anyone and yet refer the consumer to the seller.
|Usually, these people work as an agent of a business-like salesperson.
|A legally binding agreement exists between a finder and the seller or service provider for introducing a seller.
|No such agreement or contract exists for referrals.
|Such agents have a legally binding contract with the seller or service provider.
|Hence, this fee mostly gets paid in cash of the percentage or pre-determined condition.
|Moreover, it usually includes coupons, rewards, or extra services to the referrer.
|Commission happens mostly in cash or credited to the account of the salesperson or the agent.
Frequently Asked Questions (FAQs)
These fees are legal in many jurisdictions, provided certain conditions are met. The legality of finder’s fees depends on the nature of the transaction, the parties involved, and compliance with local laws and regulations.
The finder’s fee is usually calculated as a percentage of the gross revenue or profits from the business transaction resulting from the finder’s efforts. Moreover, the percentage can vary and is agreed upon in the finder’s fee agreement.
Yes, finder’s fees can include non-monetary compensation, such as equity, products, services, or any other agreed-upon consideration. The terms of compensation should be clearly outlined in the agreement.
The tax treatment of these fees depends on various factors, including the nature of the transaction and local tax regulations. It’s advisable to consult with a tax professional to understand the tax implications specific to the situation.
This has been a guide to what is Finder’s Fee. Here, we explain its agreement template, compare it with referral fee and commission, and examples. You can learn more about it from the following articles –