Finders Fees: Everything You Need to Know
Finder's fees are the commission paid to a person who facilitates a transaction.3 min read
2. When Not to Pay a Finder's Fee
Updated July 8, 2020:
Finder's fees are the commission paid to a person who facilitates a transaction. The finder is the person who brought together both parties and essentially discovered the deal. In exchange for introducing the parties, the finder takes a commission from the brokered deal.
In some situations, the finder's fee is paid by the buyer of the transaction, and in other cases, it is paid for by the seller. A finder's fee isn't legally binding, so it is often simply a gift from one party to another. This is commonly seen in real estate deals. If someone is selling their home and their friend connects them with a potential buyer, the seller might give their friend a small portion of the sale when the deal is finalized.
In the business world, finder's fees are often paid to brand advocates who bring in new business. These salespeople go above and beyond to bring in new customers and refer potential deals that you never would have gotten otherwise. They deserve some kind of compensation for the transactions they bring to the company, and the payment often comes as a finder's fee.
Using Finder's Fees to Get New Business
In many cases, finder's fees are used as a kind of referral program for contacts who introduce new customers to a company. For example, if a person helps organize a meeting between a commercial landlord and a potential tenant for a new strip mall, they might receive a finder's fee for bringing the two parties together.
Finder's fees can also happen in a number of other situations, including things like:
- A business that needs new investors is connected to a suitable fund by a business contact
- A company that wants to sell off some of its assets is referred to a potential buyer by a friend
- A company that needs a new employee hires someone who was referred to the company by a current employee of the company
An example of a finder's fee is a mortgage company looking to sell its old computer system. If someone connects the company with a potential buyer for the computers, that person could receive a finder's fee. Similarly, if a clothing store needs more clothing racks, the person who helps the store find a seller could earn a finder's fee.
Finder's fees can also be given to people to help match freelance workers or contractors with employers to complete a project. Finder's fees can be seen as a reward so that business contacts have a reason to stay up-to-date with the company's projects.
Because a finder's fee isn't legally required, contracts aren't necessary for the arrangement. However, establishing terms to the deal can be helpful in ensuring that all parties are on the same page with regard to what the finder is being paid and who is making the payment. Putting it into writing is especially helpful for finders who repeatedly help find business for the same company. Each finder may have their own terms, with some requesting 5 percent of the deal and others wanting as much as 35 percent.
When Not to Pay a Finder's Fee
Finder's fees can be helpful for growing a business and gaining customers, but there is gray area in how they are paid out. Not everyone agrees that paying a finder's fee is a good business decision.
For example, if a friend refers you to a potential customer who ends up making a purchase, many people would find it reasonable to pay 10 percent of the transaction to the friend who connected you with the customer. But what happens if the customer comes back to purchase something else? Do you still owe your friend 10 percent of the second transaction? It can be a confusing area for business owners who want to stay on good terms with their finders but not give away money unnecessarily.
One of the problems with finder's fees is that finders can be more focused on getting their cut of the deal than actually finding something or someone that is a good match for your needs. If someone knows you are willing to pay a finder's fee, they may not take the time to search for someone or something that truly fits the bill and meets your needs.
If you need help with finder's fees, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.