What is Finder's Fee
A finder's fee (also known as "referral income" or "referral fee") is a commission paid to an intermediary or the facilitator of a transaction. The finder's fee is rewarded because the intermediary discovered the deal and brought it forth to interested parties. Depending on the circumstance, the finder's fee can be paid by either the transaction's buyer or seller.
BREAKING DOWN Finder's Fee
Often, the finder's fee may simply be a gift from one party to another, as no legal obligation to pay a commission exists. For example, let's examine a real estate transaction. Perhaps an individual is selling a property and a friend discovers a potential buyer. If the transaction goes through, the seller might give a friend a small percentage of the sale, as a reward for finding the purchaser.
How Finder’s Fees Can Encourage More Business
Finder’s fees may be used to reward business contacts who refer new sales and clients to a company. For instance, if a contact arranges a meeting between the buyer and seller of a business, they might receive a finder’s fee for arranging the deal. This can also apply to businesses who seek and gain investors through referrals from others.
There can also be applied to deals where a company acquires certain assets or materials from another company. For example, if a rental car company needed more sedans to add to its fleet; a finder’s fee may be paid to an individual who arranges a purchase of used sedans from a competitor or from a business that no longer needs such vehicles. Likewise, if a movie production company was in the market to acquire more cameras, lights, and other equipment, there may be a finder’s fee for connecting the company with a seller. Finder’s fees could also be offered for securing freelance professionals or contractors to complete a project.
Such a reward is a form of incentive to keep these contacts and resources communicating the needs of a company or organization to potential clientele or partners. While contracts are not required in such arrangements, structuring and agreeing to terms for finder’s fees can keep all parties in agreement on the scope of compensation that will be paid. This may be especially useful for contacts who repeatedly attract to business to the company.
The terms of finder’s fees can vary greatly, with some citing 5%–35% of the total value of the deal being used as a benchmark.