Referral agreements play a large role in many business transactions, especially in referral marketing. Referral marketing, a type of joint venture, is when a service or product provider pays a commission to a third party for every sale they get. This commission will incentivize the third party—known as the referrer or referral party—to refer potential clients to the enterprise who may eventually become leads, regular clients, and more.
Like most other agreements, referral agreements can be tough to write. After you’ve outlined the terms of your deal, you need to make sure your agreement represents the desires of both parties through contract negotiation and editing. You also need to make sure your contract is legally enforceable, which can eat up a lot of time and energy, particularly when you have hundreds of contracts going on simultaneously. To cut down on the time and energy ordinarily spent negotiating and editing, you should adopt advanced contract management tools like Ironclad Editor to expedite referral agreement creation and execution.
Read on to learn more about referral agreements and how Ironclad can help you create, manage, and execute them.
What is a referral agreement?
A referral agreement is a legal contract that establishes a joint venture between a service or product provider and a referral party that earns commissions on sales. Based on the finalized sales made by the service or product provider, the commissions are intended to encourage the referral party to refer potential clients to the business with the hope they will eventually become leads, regular clients, and even partners.
You are likely to encounter referral agreements in a variety of situations. If you’re working at a small or medium business, you may use referral agreements to reach out to new leads or break out into new markets. You may also encounter referral agreements if your company deals with law or real estate, since many lawyers, paralegals, and real estate agents refer business to one another.
Although referral agreements are a great way of increasing your client base and target market, they also come with limitations. Depending on your jurisdiction, there may be a limit to how much you can refer business to legal and real estate professionals. There may also be strict rules about how much you can earn from referral fees and commissions. For instance, the American Bar Association generally prohibits attorneys from paying others for recommendations unless the context of the payments fits the exceptions covered under Rule 7.2(b).
How to create a referral agreement
Parts of a referral agreement
To create a referral agreement, you need to include the following:
1. The basics
As with all agreements, referral contracts must have the following to be legally enforceable:
- Date. The date should appear at the beginning and end of the contract. When it appears at the top, it should indicate when the agreement was created. When it appears at the bottom, it should appear next to each party’s signature to indicate the date of signing.
- Names and roles of the parties involved. Identify the parties to the agreement. If one of the parties is a company, list out the contact person and their role. You also need to mention which party is the service provider and which is the referer or referral party.
- Duration of the agreement. State how long the agreement will last. Depending on what you want, it can be a short-term agreement for one or two years or a long-term agreement that only ends under the terms of the agreement.
- Consideration. This is a general statement of what the service or product provider is giving the other party. In referral agreements, the commission the company pays to the referrer for finalized sales is the consideration.
- Acceptance. How will your referral agreement be accepted? Since this is a non-standard, negotiated agreement that requires a lot of customization, you will probably use traditional eSignatures over embedded signing or clickwrap.
2. Referral agreement-specific clauses
After you’ve covered the basics, you need to make sure you’ve addressed the following:
- Definition of “referral.” You need to define what “referral” means in your referral agreement to ensure both parties are on the same page. Otherwise, your referrer may end up giving you leads that don’t fit your requirements.
- An unqualified referral is an unvetted referral that consists of a name or a phone number. This is a good choice if you just want your referral party to give you a list of potential leads.
- In contrast, a qualified referral is a pre-vetted lead that has already communicated with your referral party. If you want the referrer to send you qualified leads, you need to specify that this referral agreement is specifically for qualified referrals.
- Referral fees. You can choose to pay a fixed amount or a percentage commission based on the referrals they bring in.
- After you’ve decided how you will pay your referral party, you need to decide which revenue stream you’ll be making your commissions from. To make things simple, we recommend choosing net revenues, which include gross income minus returns and credits in addition to tariffs, duties, and taxes. This way, you can ensure you’re paying commissions after all other fees have been considered.
- Referral party’s pay period. If a referral has become a regular customer, you need to specify a pay-out period to make sure you won’t keep on paying commission for repeated business. The pay-out period is the amount of time you will be paying commission to the referrer.
- Confidentiality and privacy. Before you finalize your referral agreement, you need to consider relevant industry and state privacy laws. Referral agreements require exchanging a lot of personal information, such as a potential lead’s legal name, address, and date of birth, so you and your referrer need to develop a way to safeguard this information. Consider requiring your referrer to tell potential leads the following before gathering any personal information:
- Their personal information may be forwarded to third parties
- Whether there is a simple way to opt-out. If there is a way to opt-out, provide a link to your company’s opt-out policy, which lets potential leads know they have the ability and right to opt-out of aspects of the information-gathering process.
Managing referral agreements
As you can see, drafting referral agreements isn’t easy. Creating top-notch referral agreements with so many clauses to look out for can be a challenge, especially when you’re a busy in-house counsel juggling numerous responsibilities.
Managing referral agreements can cause even more headaches. This is because referral agreements can be hard to keep track of, particularly if your organization isn’t using modern contract life management (CLM) software like Ironclad. Most companies are still creating and managing contracts separately in each department. For instance, the human resources department is responsible for drafting, managing, and storing employee contracts, while Sales keeps track of referral agreements and sales agreements.
This is acceptable for smaller companies with fewer active contracts, but if you’re an enterprise company with hundreds or thousands of active contracts, these contract silos make it difficult for anyone to get a complete picture of the organization’s contractual obligations. Without a centralized hub for storing referral contracts, Legal will have difficulty answering questions about upcoming due dates and contractual obligations. Legal also won’t be able to draft, manage, and execute referral contracts that interest several departments at once.
Automating workflows for referral agreements
Fortunately, Ironclad Editor provides an all-in-one software solution that offers full transparency into the contract lifecycle. Intuitive and sleek, Ironclad simplifies the CLM process to a scalable and predictable process.
With the powerful Workflow Designer, you can create and approve automated workflows for referral agreements that anyone can use. This will help break down your organization’s contract silos and facilitate communication between different departments so that everyone—whether they’re in HR, Legal, or Sales—can be on the same page. What’s more, you can create referral contracts with just a few clicks of your mouse. Say goodbye to drafting from scratch—all you have to do is upload a template, tag fields as needed, and add approvers and signers.
Referral agreements are integral to business transactions that require referrals. As such, you need to make sure that they are drafted properly. Otherwise, you will have to spend a lot of time and energy editing and negotiating the contract until it accurately represents the deal both parties are entering.
To simplify the CLM process, consider getting Ironclad. A premier contract management tool, Ironclad will turn contracts from blockers to enablers. With our Workflow Designer’s templatable workflows, a collaborative centralized contract repository, and other powerful functionalities, you’ll be able to write complex clauses without using a single snippet of code. Out of all the CLM tools on the market, only Ironclad adjusts approvals at the clause level, enabling you to speed-contract without losing control.
Interested? Request a demo today.
Ironclad is not a law firm, and this post does not constitute or contain legal advice. To evaluate the accuracy, sufficiency, or reliability of the ideas and guidance reflected here, or the applicability of these materials to your business, you should consult with a licensed attorney. Use of and access to any of the resources contained within Ironclad’s site do not create an attorney-client relationship between the user and Ironclad.