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Trying to get a sense of best practices around finder's fees and client relations.

A business partner (BP) of mine introduced me to a company (X) where I have done web development now for several years. How it originally worked was–I would invoice BP, and he would invoice X (adding 20% for his fees).

At one point I found it was actually easier for me to deal directly with the client. I was essentially handling all of the client requests. So I offered to do the estimates and invoicing, and I would just pay BP the 20% difference. This way BP didn't have to add an extra step.

This has been an ongoing agreement, and over time I have been feeling like I do all of the work - why should I be paying him the 20% increase. When I brought it up to BP he said that it isn't technically a finder's fee, and that its an Industry Standard to expect 20% from clients that have been referred.

BP has a valid point in that he generated the relationship with X - its a client that he has been working with for years (even if he hasn't been for the last 7 years or so). I would not have this client if it wasn't for BP. On the other hand, I have also been nurturing the relationship with X for the last 7 years.

BTW-this wasn't just thrown at me, it was in our initial and ongoing agreement - not like there were any surprises here. So I take full responsibility for taking on the "dealing directly with client" - I preferred it to having to try to coordinate with BP and the Client.

So - I have chosen to honor BP's request, as I really value the relationship. But it scratched that part of my brain that wanted to get second opinions. As this is something that I would not apply to business partners that I refer clients to–unless I am actually managing the client relations (e.g. defining requests, generating estimates, invoicing, etc). I could see an initial finders fee for the first job, but after that I would consider the additional work to be theirs. So...

  1. What are the industry standards for Finder's Fees (percentage wise, is 20% reasonable)?
  2. Would what I described above fall into the category of Finder's Fee? If not, what would you call it?
  3. Whatever you call it, is it reasonable to last forever? Or at some point would the client become my client? He also mentioned that in these circumstances what usually happens is I would buy out X from BP. Where BP would determine how much it's worth to give up X. Is this common?
  4. Do I need to 1099 the BP for the amount I am paying to BP?
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Sounds more like a kickback than a "finder's fee" -- Finders fees are generally one-time fees.

Kickbacks are ethically questionable, but done all the time. If you are raising your fees 20% to cover these costs and BP isn't doing anything, then it's a very fine line ethically. If the client were to discover you're charging 20% more just to pay BP 20%... well... if I were the client, I'd consider action based upon that.

Agents will take a percentage, but they generally do something to earn that percentage regularly such as handle the client relations.. bring in new clients/work regularly, etc. But agents don't continually collect royalties months or years after they've left the relationship with the client. If BP is bringing in new work still, even if not for this particular client, then I'd be inclined to continue to pay the percentage. If BP is literally doing nothing for you.. then why do you "value the relationship" at all? It would merely be an expense with zero benefit.

Ultimately... whatever you two agree upon is what you agree upon. There's really no "norm" when it comes to contracts regarding this type stuff. I can't say whether or not 20% is high... it seems a little high for zero work on BP's part. But ultimately it's whatever you agree to.

I, personally, would have a hard time with a financial relationship where all the burden of work and client relations are upon me. But I'd have no issue with a fee for handling client relations with respect to clerical matters - or if they are bringing new client to me regularly. Your original arrangement, where you'd invoice BP and he/she'd invoice the client, is what I prefer. That way if BP wants to mark things up, they mark things up, and it's their responsibility to be paid by the client(s). You just have to track BP and get payment from him/her.

If you are sending money to BP... you should be noting those payouts on your taxes. After all, that money is not profit for you. It's an expense. Whether or not you need a 1099 depends upon the formal entities involved. I.E. 1099s may not be required between businesses, but are with individuals. Consult your accountant.

Note that if it's actually a business partner -- as in you both work under the same company umbrella -- then you don't 1099 partners. The business files taxes and reports any payouts it made. The payouts to business personnel is the responsibility of that party to report as income. In addition, if it is actually a partnership... then income would be coming into the company not you. And the company would be paying you, not clients. This, frankly does not sounds like a business partner, but rather a freelance marketer or someone that makes a living finding clients and then hiring subcontractors. That's not really a "partnership" but rather more of a simple business relationship with another party. Wal-mart buys toys to sell from AlexToys... but that doesn't make them partners. Partners share in the rise and fall of the business.... they profit when the business is doing well, suffer when it's not, and they share in the responsibility of any expenses the business may have.

To be blunt, it sounds as though you are a fantastic cash cow for BP. They do nothing but wait for your money. Of course they consider a "buyout" reasonable... it's more money for doing nothing. Ask yourself this.... if you quit contacting BP and sending him/her the kickback, but continued working for this client, what's the down side? Surely after several years of working with the client directly, BP has little or no sway regarding your relationship with this client. If it's just "breaking a contract" you may want to start looking for a way out of this "deal". Review the contract with BP.. is there a "buyout" clause? Is there a termination date (I sincerely hope you didn't sign a "lifetime" agreement with BP for this)?

You would need to consult an attorney (which I am not), but if there's no termination date on a contract and neither party is in breech of the agreement, often simply serving adequate notice that you wish to exit the agreement can be enough. Now what is "adequate" is relative to the circumstances, which is why an attorney may be in a better place to give advice regarding this.

If there is no formal written agreement between you two... just tell BP you're done sending him the kickback. It's been several years since he/she has had any interaction with the client and any "finders-fee" has been paid at this point.

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    Thank you for this wealth of information. Very informative. We have nothing in writing - no contracts. He is a long time friend who has done a lot for me. Getting me into the industry, etc. So that is why I value the relationship. – Miznio Dec 10 '16 at 5:11
  • And thanks for pointing out the legal an ethical ramifications - especially passing on those fees to the client. Gives me a lot to think about.And I am glad that this is not common practice - as it is not something I would feel comfortable doing. Worst case scenario I may just give up the client - so as not to strain our friendship. And BP can find another developer to do their work – Miznio Dec 10 '16 at 5:20
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Nothing much to add on what Scott already mentioned. But just so you have a few more people weighing in:

  1. I think 20% is pretty steep, especially for doing nothing. I have worked with people who gave me work at their customer and then took a 25% margin but in those cases my BP handled the client relationship and, as a more senior profile than me, functioned as someone that I could turn to for questions and support. This does not seem to be the case here.
  2. No, it's a margin for doing nothing.
  3. Definitely not this version (doing no work at all), the ones I encountered were for a period (e.g. 1 year) or a specific project (eg 40 days of invoicing)
  4. Check with an accountant.
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I am not an attorney. This is SO simple. Is your agreement with BP in writing, and does it state that the arrangement is perpetual? If there's no written agreement that you won't ever invoice the customer directly, then you should do just that.

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