Every small business should have a recommendation agreement template. A simple referral agreement will help you land new business in any economy, and in a recessionary economy in particular.
You need a good referral agreement template on hand so that when a good opportunity presents itself, you are 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.
Recommendation 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 relationship between the principal and the agent:
* 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; and
* The sale to the client is made between the principal and the client (the main country a commission to the agent for obtaining the sale).
Reseller agreements are based on a primary and reseller relationship:
* the reseller purchases the principal’s products or services for resale purposes;
* the reseller determines the sale price to the customer; and
* The sale to the customer is between the reseller and the customer.
Referral Agreement Checklist
This checklist is not exhaustive, but it should provide a good start to a simple referral agreement.
* 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 referrals? Do you just want a list of prospects or are you waiting for qualified referrals? Perhaps it is simply understood that you want qualified referrals. The best practice is not to leave something that important to deduct. Get it in writing. If you want qualified references, specify that the references must be qualified and define what this means. Typically, the rating 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 agreements that require qualified referrals pay commissions based on a specific percentage of income. For prospect lists, commissions are generally paid on a specified dollar amount.
* When is the referral commission earned (ie what is the earning period)? One of the most important clauses precisely defines when a commission is earned. Usually this involves specifying a profit period. An earning period begins on the referral date and continues for a specified period of time. If a sale is made (or if a sales contract is entered into) during the waiting period, a commission is earned.
* What is the payment period? The pay period is relevant if the referral conducts repeat business or pays over a period of time. The pay period defines the period in which the income qualifies for commissions. If you do not want to pay commissions forever, you will specify that you will continue to pay commissions on the income received from the referral for a specified period of time, after which your obligation to pay commissions will cease.
* Commission payable on what income? You must specify precisely the income from which the commissions will be paid. This generally takes the form of a definition of Net Income, which generally includes money received minus (i) credits and returns, and (ii) any taxes, fees or fees related 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 referral-related conflicts. Generally, you would provide that you would use reasonable efforts to resolve any disputes, but you should also consider making your determination final.
* Confidential information. If there is a potential for confidential information to be disclosed (for example, confidential marketing plans), you should indicate that all such information is confidential, should be used only in compliance with referral obligations, and should not be disclosed without your prior approval.
* Limitation of liability. You must limit your liability to commissions payable. You must also provide that this clause will survive expiration or termination.
* Termination for convenience. Termination for convenience means that one of the parties may 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 generally applies to both parties.
* Commissions payable after termination. The agreement will expire at the end of its term, and may end before the end of the term for cause or convenience. Generally, you must provide that from and after the expiration or termination of the contract for any reason, you will continue to pay the commissions that were earned before expiration or termination. You must also provide that this clause will survive expiration or termination.
* Consider arbitration for dispute resolution. It is generally 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.
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 informational purposes only. This information does not constitute legal advice and should not be construed as such.
Copyright © 2010 Chip Cooper