How much should I pay for a finder's fee, when someone succesfully refers work to me?

Question

I work as a landscape designer/occassional installer in S. Calif., and I'm wondering what a fair percentage or flat fee would be to pay someone when they successfully refer work to me.

Basically, an aquaintance of mine would like to market and solicit business for me, in exchange for a fee upon succesfully doing so, and I'm trying to figure out what is fair/standard for doing something like this.

Any input would be much appreciated.!

Thank you. :-)

Answer 1

Best to start with a flat-fee / finders-fee structure for the new sales relationship.

With a %, you may have issues, such as:

1) hassles/disagreements over your accounting to the salesperson.  He/she wants to see all your bills to your clients.

2) risk of your salesperson discussing price or giving "estimates" to your clients directly

As far as the flat-fee amount?

To make things simple, figure 20% or 25% of your "profit" of an average job, and start with that.

Write up an agreement/contract that spells everything out, with a short review date of something like 3 or 6 months.

If they are bringing you a ton of new business, then adjust that fee up, or figure the flat fee out per job (using the info/formula in David M's answer above), or go ahead to a % of the billing.

Also, be sure and address "repeat business"  in the contract, so there is no confusion between you. (i.e. do they get paid once for bringing a new client, or paid each time the client does repeat business with you).

Answer 2

It depends on your profit margin.

They should get about 25% of the gross profit, but that is hard to compute, since individual items have different gross profits, maybe 10% of the gross sale amount, but ONLY if they close the deal for you.

Answer 3

Think of this fee as an expense.

What are your other expenses?

If your sales price is S and your other expenses are E and your desired profit is P, then:

S- xS-E = P, where x is the percent fee you give the marketing guy.

(S-P-E)/S = x

so for instance, if you charge 500 dollars, your other expenses are 50 dollars and you want to make 200 dollars profit, then:

(500-200-50)/500 = x

In this example you are giving him 50 percent, which is probably too much, but hopefully you see the technique.

Just plug in the numbers for sales price, desired profit, and total of all other expenses and you will get the x.