Referral Agreements: What They Are & When to Use Them

In my prior posts, I discussed Pilot Trial Agreements and Material Transfer Agreements. These relate to product evaluations for SaaS and biotech/food tech. In my next series on contracts, I dive into distributor relationships, starting with referral relationships. In today’s post, I discuss Referral Agreements and how they’re useful for B2B businesses. 

Referral Relationships Defined

Referral arrangements are between 2 companies, one of which is a service or product provider, and the other, a referring company. The referring company agrees to find potential customer leads and refer them to the provider, and if they make a sale, get paid a commission. This arrangement incentivizes the referring company to refer companies that are most likely to become actual customers to the provider. 

Sometimes, the referring company is operating in the same space as the provider and there is potential synergy in the companies referring each other. 

Key Terms in a Referral Agreement

Here are some key common terms to include: 

• Duration: How long the parties will work together, which can be ongoing and auto-renewing.
• Payment: What the commission is. It’s typically a % of the fees the customer pays the provider.
• Pay period: Describe how fees accrue to the referring company and often these fees will be paid out, such as monthly, quarterly, etc. 
• Lead generation process & approval: Describe how leads are submitted to and processed by the provider. Often, either the referring company submits the lead through an order form process or the potential customer submits a form themselves. The provider will usually reserve the right to turn down potential leads and will have a process by which to vet them.

Other terms to include are confidentiality, data handling if PII is provided, and other terms that are business-specific. 

Referral Agreements v. Reseller Agreements

Referral Agreements shouldn’t be confused with Reseller Agreements. The payment model and contracting process are fundamentally different. In a reseller relationship, a reseller buys the products themselves and sells them at a mark-up to customers directly, and customers usually (but not always, depending on the industry) sign a contract with the provider, often a EULA. The provider is not doing any vetting of potential customers, and resellers can even bundle products with theirs. I’ll discuss Reseller Agreements in a future post.

It’s best to work with a commercial attorney when considering partnering with a 3rd party to generate more sales. They can walk you through the relationship details and determine whether a reseller or referral relationship is appropriate for your business.