Leadership · Entrepreneurship

What is a fair commission or finders fee for getting six figure engagements?

Mindy Ph.D Executive Coaching. Leadership. LifeWorks Integration

November 17th, 2016

I have an opportunity for non-sales people to bring in six figure clients.  Does a warm introduction get a finders fee? When revenue gets generated then 10-20%? What if six figure revenue is recurring yearly; is it just the first year? What are best practices?   

Roger visionary CRO CMO SVP Sales Growth & Marketing Leader Specializing In Software,Technology & Mobile Achieving Exceptional Results

November 17th, 2016

This is all common when you can't afford to pay salaries. First let me get out of the way that you can not pay anyone a finders fee for raising of funds, it is illegal unless you are a registered rep under SEC rules. Although people will argue it's been done, stay clear as it will come back and bite you later.

I can tell you from experience that straight up referrals or "soft leads" are problematic unless you are dealing with "C" level relationships that can pass their relationships on to you, that you can close a deal with. Typically C level folks that you know will be happy to make an introduction. Some folks will take an under the table 5% of the first years revenue on the deal you close but again it jeopardizes the "C" levels position unless they are an owner of the company, again you need to be cautious here.

There are no best practices here just a plethora of suggestions that you will get across the board. Know you margins on the product or service you are selling and what vertical you participate in and carve out a percentage that you can live with first. Keep in mind that if is its software or SaaS your margins are high, if it's software development or augmentation its around 45% margin typically, hardware 30%ish, I won't speak to real estate or affiliate marketing as that is all over the place when it comes to the numbers. 

Never handcuff your fees forever. They should only apply to the first year of revenue in my opinion unless the person referring your service helps you close a long term contract. The more someone helps you get the deal the more $$. Remember that once you install a sales organization you are going to have to deal with territory and account issues. You can't pay someone 10% on account revenues for the referral and install a sales person to manage the account and pay them a salary plus commission. 

So bottom line there are no rules just suggestions and boarder line benchmarks.

And here my suggestion... 10-20 points leaning closer to 10 points if they participate in helping you close the deal. 5 points for qualified referrals. All payable 30 days after you receive payment from your customer.

Test the waters and good luck!

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

November 17th, 2016

Mindy,

Consider how difficult the effort to introduce might be and whether you'd need help during the sales process. That might help you along the scale, and 10-20% doesn't sound unreasonable.

I'd think about a full commission for year one, and perhaps half that in year two. At some point, the effort to maintain the relationship is yours, and the finders' fee should be reduced, accordingly.

Chuck Bartok Social Media Consultant, Publisher, and Contrarian Curmudgeon

November 17th, 2016

I have established 10% commission on all Networking successes, for the past 50 years, and no one ever objected to paying.

David Salinger

November 17th, 2016

Great question. More context would be helpful to give you a specific recommendation, but in general a new I'd back into what is a reasonable 'commission' by calculating your optimal gross margin on the sale.

If your business requires 60% gross margin, as an example, then you have 1-40% to work with for your incentive or commission plan.

From there, you should define what constitutes a qualified lead and then make a judgment call on what you should offer as an incentive for a qualified lead and the amount appropriate for a commission on a closed sale.

Anything >10% for a win should probably be reserved for those referrals where the person who made the introduction participates in the sales process and not just the intro.

I'd also probably avoid committing to anything based on potential lifetime value/renewals until you have a few wins that would help you predict or model that a bit more reliably.

Good luck!

Tom DiClemente Management Consulting | Interim CEO/COO | Coach

November 17th, 2016

It depends on what the finder did for you and your industry. Aside from the warnings you gotten about industries that are regulated as well as avoiding paying finder fees to government employees, and assuming you are not an arms dealer, I have found that 5% to 10% of first year revenue, paid only if and after you are paid, is normally a good way to pay fairly and maintain a good relationship that could yield more results. If there are returns or refunds, the corresponding finders fee already paid is usually withheld against future payments. It's a good thing to set up a rep type contract with these types of people.

Damon Oldcorn Managing Partner Oldcorn & Oldcorn LLP

November 17th, 2016

Warm intro is valuable but only pay on results ... Twenty percent of the gross margin for the 2 years would be about right, if as you say major 100k type contributions to sales.

Jeffrey Allen CEO at Globalcrossroadscapital.com; a US Vet-owned IR/PR firm with 8,532 1st connections

November 17th, 2016

I always get a chuckle from those who think finders fees are the only compensation in the finance industry.  Even though it isn't.  What's even funnier is the mention of payment solely on results or success.  You mean the result of client actually meeting funding approval criteria?  So why should people held hostage to the success of what someone else may or may not do? 

Jim Tormey Partner, JesseJames Creative, Inc.

November 17th, 2016

We pay our partners only when an introduction converts to business. I'm always open to discussion, but our starting point is 10% of first year's revenue. In subsequent years we're doing all of the work to generate new projects and opportunities so we do not pay for that. However, if there is legitimate recurring revenue i.e. hosting we will consider paying something in subsequent years. Mindy, I'm not sure where exactly your question comes from, but we are just launching a channel program for our sass product and looking for best practices in terms of communicating what we do to possible referral sources. We are also a Also exploring some other nontraditional compensation ideas. I would love to pick your brain offline to get your perspective on how a product or service provider can get your attention and keep their opportunities top of mind for you. Let me know if you might have a few minutes to chat in the next week or so. My email is jtormey@jjcreative.com Thanks!

Irina Poslavsky Founder and CEO at KoTrie

November 17th, 2016

If the person doing the lead generation is stellar, paying a 25% commission is reasonable, as well.

Dane Madsen Organizational and Operational Strategy Consultant

November 17th, 2016

Assuming you are not in a regulated business like Finance or real estate where commission splitting is not allowed, the a 25 to 50% of year one only is appropriate. After year one, it is the sales person keeping the businesses in place. Dane Madsen Dane@DaneMadsen.com 206.900.5852 Mobile Sent from my mobile device. Forgive typographical and grammatical errors.