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Why You Shouldn't Pay Finder’s Fees for Business Referrals

Why You Shouldn't Pay Finder’s Fees for Business Referrals
Finder’s fees, money an agency pays to someone for referring a new buyer, customer, or investor, can be a murky area. Does paying out finder’s fees make for good business manners or a bad business decision?

“I know someone who needs your services. I’ll send them your way.”

If you run a company, you’ve likely heard this from friends and people in your network. But is this simple statement of referral - one we all make almost daily recommending lawyers, hair stylists, mechanics, restaurants, accountants, and businesses of all kinds - worthy of a chunk of your profits?

My opinion is, no.

Let me be clear that what we’re talking about here is not about paying commission to sales people who work for you. I have no problem with that, obviously. But in my experience of running an agency where we experimented with paying referral fees to outside colleagues and partners, I don’t think it contributes profitably to scaling a business.

Here’s why:

The buck stops where?

So the guy who coaches your daughter’s soccer team brings you a potential client for a rebranding project. You sign the contract with the client, and you happily pay out 10% to Coach Dave. This new client loves the work you do for her and now wants to hire your agency to build an app. Awesome, right? But does that mean you also owe Coach Dave another 10% for this project?

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Is the finder’s fee just for the original intro or does it apply to all future projects? While on one hand, you want to grow the relationship with this client into recurring work, that also might mean you have to keep paying out Coach Dave from your profits.

Your margins are murky

Service-based businesses like agencies are different than product-based businesses like skin care or a software subscription.

If I sell skin care online, I know exactly what my profit margins are and the lifetime value of each customer. I know how much it costs to produce one jar of cream, how long it takes to produce it, and what I need to sell it for to make a profit.

But most service-based work, like what agencies sell, fluctuates and has narrow profits margins - 20% being the baseline. Every project is different, every client is different, and while you have some humans who are billable to execute the work (devs, copywriter, designers), you also have other humans who contribute to the project who are not billable (admin, finance). So what you end up making on each project can be different, and sometimes you don’t even realize that until the project is over.

If you’re only making 20% on a retainer and you give 10-20% of the value of the deal to your affiliate, then you end up giving away 50% of your profit. Or you have to crank up the price another 10-20% to make up for it. But raising the price may make the deal more difficult to close and look like you’re overcharging the client, which can be bad for your business reputation.

Who is it a good fit for, really?

Just because someone refers a potential client to your business doesn’t mean that client is a good fit. Sometimes outside reps can be more interested in their personal bottom line than in helping you grow yours.

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If they know you pay out finder’s fee, they may try to push as many leads your way as possible, regardless of whether they’re actually qualified, to try to quickly close business and get paid.

Then you’re left with clients who are difficult, don’t have an adequate budget, or you can’t actually help them. Meanwhile, you may have already paid out to Coach Dave.

Dinner and a movie

If you have a colleague who knows of a client who could use your agency's expertise and wants some sort of kick-back, take them out for a nice dinner or pay their bar tab as a thank you.

This has the double benefit of showing your appreciation for their ‘good deed’, while spending time with them allows you to deepen their understanding of your business and may reveal other opportunities.

If the colleague doesn’t accept this offer and won't make the connection because they aren't getting a finder’s fee, then maybe the deal wasn’t meant to be. Karma and goodwill go a long way.

The exception

There is one exception where it may be appropriate to pay for a referral, and that would be if the person referring actually helps negotiate the deal, scopes the project, consults on contract details, etc.

This would more be in the case of a large project where it’s more complicated to pitch and close, and your referrer is investing their time into making sure the deal goes through and is mutually successful and sustainable.

It’s your job

Bringing potential clients into your agency is actually YOUR job as founder.

You should be creating and nurturing outside relationships, establishing your agency’s reputation as experts, and building an account team under you to in turn build, nurture, and retain your client relationships.

The difference between one of your account directors who brings in a new lead, and someone outside who makes a referral, is that your account director can’t just walk away as soon as the ink dries on the contract. They have to continue to manage the client for the lifetime of your business relationship, so they’re going to be more motivated to make sure it’s a good fit for your agency. A sustainable, profitable, nice-to-work-with client.

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Pay yourself

Instead of paying money OUT to get more business, a better strategy would be to pay yourself, - your business - by investing in things that will help attract and keep new clients. Maybe that’s human resources - hiring new people with specialized skills (or upgrading existing staff skills) who would allow you to expand your service offerings or advance your competitive edge.

Maybe it’s investing in the development of a product, like an app, which could bring recurring revenue and cash flow stability into your business, not to mention new clients.

Or you could invest in technology to improve how your team works, streamline your processes, or offer enhanced service to your clients.

The bottom line is that your profits should belong to you, not being paid out in finder’s fees to people who aren’t really invested in your business or your clients’.

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