What is a referral agreement?
A referral agreement is a type of agreement where one party (the principal) pays another party (the referrer) to refer clients to them. Alternatively, the agreement could be a two way referral agreement where both parties refer clients to each other.
Who puts in place referral agreements?
Referrals are quite common, especially in the age of the internet and working remotely. For example, maybe you want some work done that can be done online and so you contact a company that offers to provide you with a number of quotes. Each quote will come from a different business that has a referral agreement with the company you originally contact. Referrals are also common in the tourism industry.
Many car dealerships have referral agreements in place with finance providers. Financial planners have referral agreements with accountants. Real estate agents have them with mortgage brokers and property lawyers. Architects have them with builders. Builders have them with other tradespeople. Website developers have them with graphic designers. The list goes on! Any time that a client needs more than one service provider to complete a project or task and there are likely to be multiple businesses referring work to each other.
Referrals are great for start-ups and freelancers because they enable them to increase their workload, income and establish their reputation within the industry. Referrals also benefit larger and established businesses because their own client relationships are strengthened when they refer their clients to a good service and they can make some money from it as well.
The risks with referral agreements
The risk with referrals is that established businesses may damage their reputation by referring their clients to poorly performing businesses. If the referral arrangements are only verbal, then it can be difficult to manage the relationship if things start to turn sour. It pays to formalise the arrangement in writing because both businesses have the opportunity to negotiate and agree upon terms that protect their interests.
Here are some of the terms that you should include in your referral agreement:
- The parties to the agreement – who is the referrer and who is the principal? Are both parties referring clients to each other?
- The type of work being referred – it is important to write this out in detail where the two businesses offer some of the same services.
- The referral fees – how they are calculated and when should they be paid.
- The term of the contract – how long does the agreement run for?
- Performance standards – a requirement that certain performance and quality standards are maintained and how this will be measured and monitored.
- Failure to meet performance standards – what will happen if one party believes the other party is not meeting the performance standard expectations.
- Exclusivity – whether the referral agreement is exclusive or the parties can enter other referral agreements.
- A confidentiality clause – to protect client information.
- The agreement should also include a broad indemnity clause – so that if one party gets sued for malpractice or professional misconduct, based on a referral from the other party, then the other party won’t also be liable.
- Finally, disputes happen to the best of us – the agreement should include a dispute resolution clause.
- Termination – lastly the agreement should include the circumstances in which the agreement can be terminated and whether and how much notice needs to be given.
There is a bit to think about in any referral agreement, so you can let us do that thinking for you and you concentrate on generating referrals!