All UK companies need new business, whether they are a multi-national with the lion’s share of their market or a start-up hoping to gain a foothold into an industry. Introducer relationships can be the key to business growth, they can also complement the work of an existing sales department. In this article our commercial solicitors look at why your business needs an introducer agreement if you are entering into a referrer-referee relationship and what your business needs to know to make the introduction arrangement work for both parties to it.
- What is an introducer agreement?
- How does an introducer agreement work?
- What are the advantages of an introducer agreement or referral agreement?
- How to structure the commission payments in an introducer relationship
- What should be included in an introducer agreement or referral agreement?
- Does an introducer agreement or referral agreement need to be in writing?
- What is the difference between an introducer and a sales agent?
- Is an introducer agreement the best option for your business?
What is an introducer agreement?
An introducer agreement sets out the contractual basis upon which work or customers will be referred by a referrer to a referee business, the terms of the introducer’s remuneration will also be agreed. As an introducer is not an employee of the company or employed by the referee company on an agency or freelance basis it is crucial that there is a contract in place between the introducer and the business receiving the introduced customers, clientele or work.
If you have not heard of an ‘introducer agreement’ then you may know about referral arrangements by use of another term. For example:
- Referral agreement
- Affiliate agreement
- Sales commission agreement
- Commission agreement
- Finder fee agreement
Whatever you call an introducer agreement the point is that the business relationship between a business owner (whether they are a start-up, SME or multi-national) and the referrer (whether they are an individual, sister company or referral network) should be regulated in the same way as any other commercial transaction with the signing of a commercial contract. Without an introducer agreement in place there is greater risk that a commercial contract dispute will arise over the terms of the referrals and the remuneration leading to commercial litigation. An introducer agreement can minimise the risks and costs of commercial litigation.
How does an introducer agreement work?
At its most basic an introducer agreement works by regulating how a referrer will introduce clients to a referee business. Without an introducer agreement in place there is a very high risk of commercial disputes cropping up over issues such as exclusivity of referrals, remuneration for referrals or termination of the introduction scheme.
There is sometimes a reluctance, depending on the sector, of using introducers. Commercial solicitors say that an introducer agreement simply recognises that not every business or organisation is brilliant at attracting new work and that introducers have an expertise that many companies need to either maintain their market share or get ahead of the competition and grow their business.
What are the advantages of an introducer agreement or referral agreement?
Marketing can be hit and miss. You can place an advert in a national newspaper, run a television advert or be highly active on social media but not get the return on investment. It is not a case of blaming the marketing department but looking at all options to best attract new business.
The main advantage of an introducer agreement or referral agreement for the referee is that your business only pays if the referrer delivers results. The onus is on the introducer to locate the client and refer them to your business. Provided that both parties comply with any industry specific introducer regulations, the referral agreement can be seen as a win-win deal. Unlike the television advert or employed sales team, your business only pays for results. That isn’t to say that you should not maintain or even increase your advertising and marketing budget or employ more sales staff, but the advantage of the introducer agreement is that a third-party is providing a result driven solution to provide new clients and work. That is a distinct advantage as most UK businesses cannot be solely reliant on repeat business and returning customers.
For the referrer or introducer, one of the main advantages of a referral arrangement is that they receive a commission payment without needing the expertise or business structure in place to meet the client’s requirements themselves. They are just ‘creaming off’ a fee or a percentage of the referee’s charges to the client. For some referrers this is their sole business objective, whereas other referrers will accept some clients and refer others on to a referee. For a referrer it is a win-win as they will retain clients or customers who require goods or services that they can supply, and they can refer on those potential clients where they do not have the necessary skills, expertise or stock to meet the client’s needs. That is a definite advantage as the introducer is getting referral fees for a client that they could not service anyway.
How to structure the commission payments in an introducer relationship
With introducers the key to the business relationship is how the remuneration is structured. There are many different options and a commercial solicitor will talk through the options with you to get the best introducer agreement to meet your business needs. Therefore, expect questions because without commercial information an introducer agreement solicitor won't know how best to structure the commission payments.
With commission structure you need to consider:
- Is the payment a fixed fee or a percentage of the fees realised through the referral or a combination of the two?
- Are there different types of referral from the same introducer? If so, the commission package needs to reflect this.
- Is the commission payment payable on referral or when the fees are generated? How are the fees calculated? Net fees should be calculated as net of any VAT or expenses.
- Is there an industry set practice for introducer agreements and commission payments. If so, there may be limited scope to negotiate.
- Will there be an audit structure for the introducer to check remuneration if the fees are dependant on the introduced potential customer or client actually converting to a sale?
What should be included in an introducer agreement or referral agreement?
The precise terms of the introducer agreement will depend on your industry sector and whether there are any specific regulations that affect your area of business. However, with most introducer or referral agreements you should consider this introducer agreement checklist:
|Introducer agreement clause
|Why is the clause necessary
|The parties to the agreement
|It is vital to know who the referee is receiving referrals from. This could be an individual or a company with a network of referrers who have all undergone the same induction and training experience, but the referee can hold the referrer business accountable for the actions of its staff.
|The geographic area of the contract for referrals
|In some situations, referrals are internet based so a geographic area is not appropriate. In other scenarios an introducer may be restricted to a geographic area, such as the UK or specific counties in the UK.
|The introducer services
|It is essential to define what type of client or consumer constitutes an introduction or referral. An introduction that does not to require the services your business provides is not the type of introduction that you want to commit to paying a fixed fee for.
|The regulatory framework that referrer and referee must comply with
|Depending on the nature of the referee business there may be specific legislation and regulations on how introducers can introduce potential new clients. For example, in the financial services industry or legal sector, the introducer agreement should ensure that both referrer and referee are committed to uphold any specific industry standards, such as no cold calling of potential clients. In addition, all introducer agreements should include compliance with anti-bribery legislation.
|Authority of the referrer
|The limits of the authority of the referrer should be made clear in the introducer agreement. For example, if the referrer is not allowed to offer any warranties or discounts to prospective clients. This clause can also make it clear that the referrer has no authority to enter a contract with the potential client and referee business.
|Restrictive covenants or exclusivity clauses
|The referrer may be restricted from referring potential customers to another company, so there is an exclusive introducer agreement. Alternatively, the exclusivity could be limited to a specified geographic area or product.
|Is the introducer entitled to a fixed fee or a percentage-based commission payment? When is payment due? It is best to be clear on payment terms to avoid commercial disputes. For example, is payment due within twenty-eight days of the referral or when the client pays the referee? If the payment is a commission based on a percentage of fees, then is the commission calculated on the invoice rendered to the introduced client or on the actual fees paid? If commissions are paid on a monthly or quarterly basis the payment terms should specify if a commission statement will be prepared to include the details of how the introducer fees have been calculated. The introducer agreement should also say if interest payable if referral fees are paid late.
|Accounts and auditing
|Introducer agreements can be complicated because of the nature of the referrals, the element of delay between the initial introduction and the conversion of the potential customer to a paying customer, and the payment terms. That is why there not only needs to be an element of cooperation and trust between referrer and referee but also contractual provisions for the accounting and auditing of referral fees. This, in turn, raises data protection and confidentiality issues that need to be addressed in the introducer agreement.
|In a successful referral arrangement, a referrer and referee will work closely together, so consideration needs to be given to the terms of a confidentiality agreement or clause and whether the confidentiality clause will survive the termination of the introducer agreement and, if so, for how long.
|Data sharing is the key to an introducer relationship. That is why it is essential that the introducer agreement should cover the precise data protection issues that are likely to arise through the introduction scheme. The agreement should require compliance by both parties of the commercial contract to the relevant data protection legislation and GDPR. If the referrer or referee are based in the EU consideration needs to be given to relevant EU legislation.
|As commission payments in introducer agreements can get complicated it is sensible to include an alternate dispute resolution clause in the commercial contract. Commercial solicitors often recommend that commercial mediation is included as the agreed method of resolving any referral or remuneration disputes. For more information on alternative dispute resolution read our article: Types of alternative dispute resolution methods: choosing the best one for your business.
|It is usual practice to include an indemnity clause so each party to the introducer agreement indemnifies the other against all liabilities, costs, expenses, damages and losses, including but not limited to any:
|Limitations on liability
|It is good practice to include limits on liability in the introducer agreement. For example, so there is certainty, your business may want to specify that any claims under the introducer agreement must be made within a specified timeframe or claims will only be processed if the claiming party has followed the claim process in the introducer agreement.
|Termination of the contract and the consequences of termination
|The introducer agreement may be for a fixed period of time, but termination provisions should also be included. For example:
|Variation of the introducer agreement
|It is usual for an introducer agreement to say that no variation of the agreement shall be effective unless it is in writing and signed by the parties to the referral agreement.
|Governing law and jurisdiction
|To avoid any dispute over the governing law and jurisdiction the introducer agreement should specify if the commercial contract is governed by and construed in accordance with the law of England and Wales or an alternate jurisdiction.
Does an introducer agreement or referral agreement need to be in writing?
In many scenarios, excluding some regulated sectors, there is no legal requirement for any commercial contract, including introducer agreements and referral agreements, to be in writing. However, commercial solicitors recommend that no matter how simple the referral arrangement is a formal commercial contract or introducer agreement should be drawn up that meets the specific needs of referrer and referee. That is because without a written agreement there is a greater risk of a fall-out leading to commercial litigation. If the terms of the agreement are not clear there is the risk of reputational damage if one party breaches the agreement because of the close working relationship between referrer and referee, so it is in both parties best interests to understand and comply with their contractual obligations.
What is the difference between an introducer and a sales agent?
The difference between an introducer and a sales agent is that an introducer or referrer introduces whereas a sales agent completes the deal and actually sells. An introducer merely gives you the introduction and information to complete the conversion of a potential client or customer to a sale leaving the referee to complete the transaction. If a business uses the services of an external sales agent, they need a sales agreement.
Is an introducer agreement the best option for your business?
With introducer agreements and sales agents, it is not an ‘either/or’ situation. Depending on the nature of your business you can combine both the use of an introducer with a team of sales agents. Commercial solicitors are keen to emphasise that what works for one industry does not always work for another type of business. Therefore, the decision to enter into an introducer agreement or rely exclusively on inhouse marketing and the use of sales agents is down to your industry specific market research. However, the key to a successful business is if you are using an introducer to have a carefully prepared introducer agreement in place to protect your business interests.