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Home / Business Contracts / Referral Agreement

What is a Referral Agreement

It is a business agreement between two businesses where one Party agrees to refer customers to the other Party for a reward.

Imagine increasing your sales by over 300% without spending an additional cent on your marketing. It is possible through a referral marketing strategy.

The marketing tactic guarantees increased return on investment(ROI) and huge benefits:

  • Improved customer trust, loyalty & retention;
  • Increased marketing reach;
  • Improved business value;
  • Nurturing ideal customers;
  • Increased ROI without additional spending.

However, your success in referral marketing rests on your reputation and a well-crafted referral agreement.

Who signs Referral Agreement?

Party A (Receiver) and Party B (Referrer) will both sign the document.
E.g., if you sell a product and want your customers to refer potential customer to you, and your customer becomes the referrer.

Why is a referral agreement relevant?

It is essential because it creates the terms of the legal and business relationship between your referrer and you. For instance, it sets out the rules of doing business with people (referrers) interested in referring other buyers to you. The agreement helps to make both parties feel secure and trust each other.

Essential Referral Agreement Clauses

The list of clauses in a referral agreement document isn’t exhaustive, but the key clauses in a referral agreement are set out below:

1. Define the relationship between the parties

It states the relationship between individuals doing business together. For example, one Party (you) is the principal, and the other Party (referrer) is the agent.
E.g., a trainer and a gym company have a referral agreement. The trainer (referrer) refers clients to the gym company; gets a reward for the referred customer.

2. Exclusivity

The exclusivity clause prevents both parties in a referral agreement from entering into a similar arrangement with a competitor. Although the term may restrict future opportunities, if both parties benefit from exclusivity, it is reasonable to use it.
E.g., an exclusivity clause can help your business, and the referrer maintains a competitive edge over the competition.

3. How will you pay your agent or not?

You can choose either a percentage commission or a specified amount on the referrals they bring. It is better to set out the exact method for calculating the fees in the agreement.
E.g., a builder and a painter can have a referral agreement. The builder (the referrer) refers his customers to a painter (the referee). The builder gets a fee for the referred customer.

4. Referral Process

The clause defines how you would like the referral to occur. It can be that one party provides the other party with details of the referred by email. But, you could choose an online referral process allowing customers to opt-in.
E.g., Party A advertises a gym membership of Party B in their health newsletter using referral code. Party A customer enters the code number to sign up for the gym membership in the newsletter. The coupon code lets Party B know the source of the referral, and Party B gets the agreed reward.

5. Intellectual Property

The clause allows you to grant your referrer a license to use any relevant intellectual property you own for a successful referral program.
E.g., a referrer can promote a referral partner’s special deal on its website. An intellectual property license allows the other Party to display their logo and materials on the referrer’s site without infringing the partner’s IP.

6. When is the Referral Commission Earned?

The commission clause sets out the earning period, a specified period beginning with the referral date. If a sale happened within the earning period, it earned the commission. The clause must indicate the earning period or the method of calculating the amount to be paid for the referral.

7.  Duration of Agreement

The duration clause states the duration of the agreement; it could be a:

  • short-term period, such as two years; or
  • The long-term plan, like an ongoing contract; it only ends if one Party ends it for any reason set out under the contract.

For an ongoing referral agreement, it rarely has an exclusivity clause or a limited referrals quota. It is a flexible arrangement, especially for businesses looking for reliable customer acquisition.

Conversely, a short-term duration clause may be ideal when partnering with a business promoting a time-sensitive product or service.

Main risks with a referral agreement

A good referral agreement allows for flexibility and spells out the terms of the contract. But business needs and market conditions can change, enabling the parties to re-evaluate the deal when appropriate. Thus, a clause allowing the parties to terminate the agreement with notice can be included, even if neither party has breached or contravened the terms of the agreement.

Do you need a referral agreement?

Your business will benefit immensely from a referral marketing strategy if you put in place a sound referral agreement to protect your referrers and you.

If you need a business attorney to help you with better quality and cost-effective referral agreement, we are here to help.

Please get in touch now if you have any questions.

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