Introduction

You’ve found a great opportunity to team up with another business or professional and bring in some extra revenue through referrals. Sounds like a win-win, right? But before you start sending clients and customers their way (or vice versa), there’s one crucial step: drafting a solid referral agreement.

A referral agreement is like a roadmap for your business partnership. It spells out who gets paid, how much, and under what conditions. But just like with any roadmap, you don’t want to miss any important signs—or you could end up lost in a maze of confusion, disputes, or unpaid commissions.

Let’s dive into what you should consider when entering into a referral agreement to keep everything running smoothly and ensure everyone’s happy (and getting paid).

Read: AI vs. manual contract review: Which is right for your business?

Define the parties: who’s who in this deal?

Start with the basics: clearly define who the parties are in the agreement. This isn’t the time for guesswork or vague titles. Use full legal names, business names, and addresses to identify who is making the referrals and who is receiving them.

It’s also helpful to clarify the roles. Are you the referrer (the one sending clients or customers), or the referee (the one receiving them)? Making this distinction upfront avoids any potential confusion about who’s doing what.

Scope: what's being referred?

Next, nail down the scope of the agreement. What exactly is being referred referring? Is it new customers, specific types of clients, or sales of a certain product or service? Be as specific as possible to avoid any misunderstandings later.

For example, instead of saying, “Refer customers to our business,” you might say, “Refer new small business clients who require website development services.” The more specific you are, the clearer it is for both parties what kinds of referrals are expected.

Payment terms and commission: show me the money

Ah, the heart of the referral agreement: how you’re getting paid. Clearly outline the commission structure and payment terms to ensure there are no surprises when it comes time to cut the check.

Commission rate

Specify the percentage or flat fee you’ll receive for each successful referral. Will it be 10% of the sale? A $100 flat fee per client? Lay it out in black and white.

Payment schedule

When will you get paid? Monthly, quarterly, or after each referral is converted into a sale? Make sure it’s clear so you’re not left wondering when the money will show up in your bank account.

Triggers for payment

Define what constitutes a “successful” referral. Is it when a lead is generated, when a sale is made, or after the customer has paid in full? Set clear criteria to avoid disputes.

Duration of the agreement: How long are we doing this?

Determine the duration of the agreement. Is this a short-term arrangement for a specific project or a long-term partnership? Specify the start and end dates of the agreement or clarify if it’s ongoing until terminated by either party.

If it’s an ongoing agreement, include a clause that outlines how either party can terminate the agreement. For example, “Either party may terminate this agreement with 30 days' written notice.” This gives both sides flexibility if things don’t work out.

Exclusivity: Is this a monogamous relationship?

Consider whether the agreement is exclusive or non-exclusive. Are both parties allowed to enter into similar arrangements like this one with others, or not?

Define whether exclusivity is a requirement, and if so, outline the terms clearly. For example, “The Referrer agrees not to refer clients in need of SEO services to any other agency during the term of this agreement.”

Confidentiality and non-disclosure: keeping secrets safe

In many referral arrangements, you might be sharing sensitive information, like customer details, pricing, or sales strategies. To protect this information, include a confidentiality or non-disclosure clause in your agreement.

Specify what information is considered confidential and ensure both parties agree not to disclose or misuse it. This protects you if the other party decides to use your secrets to benefit themselves—because who needs that drama?

Read: 7 common contract mistakes that could cost your business thousands

Dispute resolution: let’s keep this civil

No one likes to think about disputes, but they happen. Include a dispute resolution clause to outline how conflicts will be handled. Mediation? Arbitration? Rock-paper-scissors? (Okay, maybe not the last one.)

Specify the preferred method of dispute resolution and the place (i.e., jurisdiction) where any legal matters will be settled. This keeps things professional and reduces the likelihood of ending up in a drawn-out courtroom drama.

Performance expectations: Set the bar

Make sure your agreement outlines performance expectations. How many referrals are expected per month? Is there a minimum or maximum? What quality of referrals are acceptable?

This prevents the other party from sending you every “lead” that breathes, and ensures that they’re actually working to generate meaningful business.

Compliance with laws and regulations: Playing by the rules

Make sure your referral agreement has a clause saying both parties will follow all relevant laws and rules. Depending on your industry, there might be specific regulations about referral fees, data protection, or marketing practices.

Include a straightforward line like, “Both parties agree to comply with all relevant laws and regulations related to referral activities.” This keeps everyone on the right side of the law.

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Regular review and adjustments: flexibility is key

Lastly, agree on a schedule for regular review and adjustments. Markets change, business needs shift, and what worked a year ago might need tweaking today. Set a time frame to review the agreement periodically (e.g., every six months) and make necessary updates.

This keeps the agreement relevant and ensures both parties remain happy and committed to the partnership.

Conclusion

Entering into a referral agreement can be a great way to generate extra business and build valuable partnerships, but only if you do it right. By considering the key elements like defining roles, setting payment terms, protecting confidentiality, and planning for disputes, you can create an agreement that works for both sides.

Remember, clarity is your friend in any contract. Take the time to think through the details, ask questions, and negotiate terms that protect your interests. After all, a little upfront effort can prevent a lot of headaches (and lost commissions) down the road.

How Cobrief can help with contract review

Reading your business contracts can feel overwhelming as an owner-manager of a small to medium-sized business. That’s where Cobrief comes in. Cobrief helps business owners and operators review their business-to-business contracts for legal risks.

Upload your contract to Cobrief's AI contract review software, click review and you’ll get a list of all the risks, in plain English. This helps you decide whether to sign, negotiate or reject the terms of your contract, or hire a lawyer. Think of it as a heat map for your contracts.

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