# How do you write a referral fee agreement?
A referral fee agreement defines the qualified referral, the fee and its base, the term, the payment date, client registration and non-circumvention.
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You write a referral fee agreement by putting seven things in writing before the introduction is made: what counts as a qualified referral, the fee and the exact amount it is calculated on, how long the referral lasts and whether repeat business counts, when the fee is payable, how a referred client is registered, a non-circumvention clause, and a statement that the payment is lawful for both parties in the sector concerned. Everything else in the document, from tax forms to governing law, supports those seven points.
Referral law differs by country, by state and by industry, and several regulated sectors restrict or forbid paying a person who holds no licence. The rules quoted here are named with the body that publishes them and the place they belong to. This article is general information, not legal or tax advice, and the outline it gives is a starting point to adapt with a lawyer.
Most disagreements over a referral are not about whether a fee was promised. They are about a word nobody defined: which client, which deal, which amount, until when.
$6,660gap between a 20% referral fee on the gross fee and on the net fee, same deal
14%of the broker's gross fee: what 20% of the net fee comes to once a co-broker takes 30%
$4,800extra fee on a second engagement when a repeat-business clause pays 10%
Illustrative worked example detailed below: a $1,850,000 business sale, a 6% success fee, a 30% co-broker share.
## What counts as a referral, and what does not?
A referral is the introduction of a named prospect to a provider, made so that the provider can win that prospect's business, where the referrer does none of the work that follows. The referrer passes a name and a context, then steps back. The provider qualifies the prospect, negotiates the engagement, does the work and carries the liability.
That boundary matters commercially, because a person who also negotiates or advises the client is doing a share of the job, and legally. In licensed fields, the dividing line between a permitted introduction and an activity that needs a licence is usually drawn at exactly that point: naming a prospect is one thing, discussing price, terms or the merits of a transaction is another. An agreement that describes the referrer's role narrowly, and a referrer who stays inside that description, are both easier to defend.
Three situations are commonly mistaken for referrals and belong in other documents: a lead bought at a fixed price per contact, owed whether or not a deal follows; a finder asked to locate a buyer or an investor and paid on the transaction; and a colleague who shares the mandate and the work, who is a co-broker.
## Which clauses does a referral fee agreement need?
A referral fee agreement needs nine clauses: the parties and their licence status, the definition of a qualified referral, the fee and its base, the term and repeat business, the payment date, registration of referred clients, non-circumvention, reporting, and a compliance statement with governing law. The table sets out what each one settles and the dispute that tends to follow when it is absent.
| Clause | What it settles | Dispute it prevents |
| --- | --- | --- |
| Parties and status | Who refers, who pays, licences held by each | A payment that one party was not allowed to make or receive |
| Qualified referral | The conditions an introduction must meet to earn a fee | A fee claimed on a client the provider already knew |
| Fee and base | The percentage or amount, and the sum it applies to | Gross against net, fee against deal price |
| Term and repeat business | How long a registered client stays attributed | A claim on work done years later |
| Payment date | The event and the number of days that trigger payment | A fee demanded before the provider is paid |
| Registration | How a client is logged, and who answers | Two referrers claiming the same client |
| Non-circumvention | Dealings with the client outside the agreement | The same deal rebooked through another entity |
| Reporting | What the referrer is told and when | A fee nobody can check |
| Compliance and law | Lawfulness, tax forms, disclosure, forum | An unenforceable promise |
The order of the table is also a sensible order for the document, because every later clause leans on the definitions.
## How do you define a qualified referral?
A qualified referral is defined by four tests written into the agreement: the client is new to the provider, the introduction was registered before any other contact, the client signs an engagement within a stated period, and the engagement is of a kind the agreement covers. An introduction that fails one of the four earns no fee, and the agreement says so.
The "new client" test needs a reference point. A common wording treats a prospect as new when the provider has had no engagement and no documented commercial discussion with that prospect during a look-back period, for instance the previous twelve months. Without a look-back, a provider can decline a fee by pointing to an email exchanged years earlier, and a referrer can claim one on a client who was already in talks.
The conversion period is the time allowed between the introduction and the signed engagement. Ninety or one hundred and eighty days are common choices; the right figure depends on how long a sale cycle runs in the trade.
Scope is the fourth test. Whether a later valuation assignment or a financing mandate for the same business owner also qualifies is answered by a single sentence listing the services covered. Add the affiliates on both sides: a fee owed when the client engages the provider is easy to avoid if the client signs with the provider's sister company, and equally easy to inflate if any company linked to the client counts.
## What should the referral fee be calculated on?
The referral fee should be calculated on a base that the agreement names in full, and the usual choice is the fee the provider actually receives from the referred engagement, net of any share paid to a co-broker. A percentage without a base is an unfinished sentence: twenty percent of what, and after which deductions?
Four bases are in common use. The gross fee is the whole fee invoiced to the client. The net fee is what the provider keeps after sharing with a co-broker or a cooperating firm. A net fee after expenses deducts agreed costs as well, which requires a closed list of those costs and a cap. A percentage of the deal price ignores the provider's fee altogether and ties the referrer to the transaction value. The chart applies the four to one illustrative deal: a business sold for $1,850,000, a 6% success fee of $111,000, a co-broker entitled to 30% of that fee ($33,300), and $5,000 of agreed expenses.
One deal, four bases, four referral feesSale price $1,850,000, success fee 6% ($111,000), co-broker share 30%, agreed expenses $5,000. Illustrative.
The rates are examples chosen for the computation, not market figures.
The spread between the highest and the lowest result is $7,660 on a single deal, and both parties can honestly believe they agreed to "twenty percent". The wording that closes the question names the base, lists what is deducted from it, and states that nothing else is. Three further points belong in the same clause: whether retainers and other non-contingent fees paid by the client count; whether the fee is reduced in proportion if the provider grants the client a discount or a refund; and whether the amount is stated inclusive or exclusive of any sales tax or value added tax that applies where the parties are established.
A fixed amount per engaged client is the alternative to a percentage, and it is simpler to administer.
## How long does the referral last, and does repeat business count?
A referral lasts for the protection period written in the agreement, counted from the date the client was registered, and repeat business counts only if the agreement says so. Two durations are in play and they are often confused: the term of the agreement itself, and the period during which a registered client stays attributed to the referrer.
The term of the agreement governs when new referrals can be made. It can be a fixed year that renews, or open-ended with notice. The protection period governs each client individually. A referrer who registers a client one week before the agreement ends should not lose the fee because the engagement was signed a month later, so the agreement states that clients registered during the term remain protected for the full period after termination. The right length follows the sale cycle of the trade.
Repeat business is the clause with the most money attached over time. Three models exist. The first engagement only: one fee, then the client belongs to the provider. A full fee on every engagement signed within the protection period. A declining scale, for instance the full rate on the first engagement and half of it on later ones within the period. On the illustrative deal above, a second engagement producing a $48,000 fee and paid at 10% adds $4,800 to the referrer's earnings, which brings the total from that client to $20,340 on the net-fee base.
Whatever the model, the clause should say what happens when the provider's own engagement with the client continues past the protection period. If the engagement was signed inside the period and the fee is collected outside it, the usual answer is that the referral fee is still owed, because it was earned at signature.
## When is a referral fee payable?
A referral fee is payable within a stated number of days after the provider receives cleared funds from the client, and only in proportion to what was received. This "paid when paid" rule is the norm, because the provider cannot be asked to advance a share of money that has not arrived. Ten to thirty days after receipt is a common window.
The clause has to cover a fee that does not arrive in one piece. If the fee comes in instalments or part of it is deferred, the referral fee follows each receipt at the same percentage. If the client obtains a refund, the agreement says whether the referrer returns the matching share, and within what period.
Three short additions make the clause complete: the method and currency of payment, a rate of interest or a fixed charge on late payment where the governing law allows one, and the provider's duty to take reasonable steps to collect its own fee. Without that last sentence, a provider who waives the fee for commercial reasons also waives the referrer's share without having to ask.
## How do you register a referred client?
A referred client is registered by a written notice from the referrer naming the client, which the provider accepts or rejects in writing within a fixed number of days. Registration is the evidence on which every later claim rests, and it replaces memory with a dated record.
The notice should carry the client's legal name and any trading name, the contact person, the service the client is expected to need, and the date. An email to a designated address is enough if the agreement says so. The provider then answers within a short period, five business days for instance, in one of three ways: accepted, rejected because the client is already known, or rejected because another referrer registered the client first.
Two rules avoid most registration disputes. The first is priority: where two referrers introduce the same client, the earlier accepted registration prevails. The second is silence: the agreement states whether a notice left unanswered at the end of the period is deemed accepted or deemed rejected. Either choice is workable provided it is written down.
Registration also has a life span. A registered client who has not signed an engagement by the end of the conversion period drops off the list unless the referrer renews the registration, which keeps the provider's list of protected names current.
## What does a non-circumvention clause do in a referral agreement?
A non-circumvention clause commits the provider not to deal with a registered client in a way that avoids the referral fee, and it treats any such dealing as if the fee had been earned.
The routes are predictable, and the clause names them. The engagement is signed by an affiliate of the provider. It is signed by an affiliate of the client. It is postponed until the day after the protection period ends, after discussions that took place inside it. The client is passed to a third firm that pays the provider a fee of its own. For each, the clause states that the fee is owed as though the provider had signed with the registered client during the period.
Drafting discipline matters more here than severity. Courts in many jurisdictions read restrictive clauses narrowly, and a clause that is unlimited in time, covers every company the referrer has ever mentioned, or imposes a penalty out of proportion to the fee may be cut down or set aside. A clause limited to registered clients, to the protection period and to the fee that would have been due is easier to enforce than a broad one. The referrer usually gives a mirror undertaking to keep the provider's terms confidential.
## Where is paying an unlicensed referrer restricted?
Paying an unlicensed referrer is restricted in several regulated sectors, including real estate settlement services, securities, and legal services in the United States, and the restriction usually applies to the payer as well as to the recipient. In an unregulated trade, such as most equipment or general business-to-business services, a referral fee is a matter of contract. The table gives four rules read at their source; each belongs to the jurisdiction named and to no other.
| Sector and place | What the rule says | Source |
| --- | --- | --- |
| Settlement services, United States | No fee or thing of value for referring settlement service business involving a federally related mortgage loan; referral arrangements between real estate agents and brokers are exempt | Regulation X, Consumer Financial Protection Bureau |
| Real estate brokerage, Texas | A licence holder may not share a commission or fees with an unlicensed person who engages in acts for which a licence is required, unless the law provides otherwise | Rules of the Texas Real Estate Commission |
| Securities, United States | Finding investors for, making referrals to, or splitting commissions with registered broker-dealers may require registration as a broker | Guide to Broker-Dealer Registration, Securities and Exchange Commission |
| Legal services, United States | A lawyer shall not give anything of value to a person for recommending the lawyer's services, with listed exceptions | Model Rule 7.2, American Bar Association |
Each rule carries detail that a table cannot hold. Regulation X defines a referral broadly, as any oral or written action that has the effect of affirmatively influencing the selection of a settlement service provider, and it also permits an employer's payment to its own employees for referral activities. The Securities and Exchange Commission's guide lists questions that point towards registration, among them whether compensation depends on the outcome or the size of a transaction. The American Bar Association's rule is a model: each state adopts its own version, and the exceptions include nominal gifts given as an expression of appreciation and reciprocal referral agreements that are not exclusive and are disclosed to the client.
Other regulated fields and other countries have their own regimes. The practical step is the same everywhere: before the rate is discussed, each party checks with its own regulator or licensing body whether the payment may be made and received, and on what conditions.
Disclosure sits next to licensing. Some rules allow a referral fee only if the client is told about it, so the agreement states who informs the client, and when.
## What tax paperwork goes with a referral fee?
A referral fee is business income for the person who receives it and a business expense for the person who pays it, and the paperwork exists to document both sides. The agreement does not need tax advice in it; it needs the three sentences that make the paperwork possible.
The first states that the referrer is an independent contractor, responsible for the referrer's own taxes and social contributions, with no employment or partnership created. The second requires the referrer to supply tax identification before the first payment and an invoice or payment request for each fee. The third says whether the amounts are stated before or after any sales tax or value added tax.
In the United States, a business that pays fees or commissions for services to a person who is not its employee reports them to the Internal Revenue Service on Form 1099-NEC. The Service's instructions for that form state that, for tax years beginning after 2025, the reporting threshold is $2,000, an amount that may be adjusted for inflation from calendar year 2027, and that payments to corporations are generally exempt. The same instructions provide for backup withholding on reportable payments when the payee has not furnished a taxpayer identification number. Cross-border referrals add questions of withholding at source that depend on the two countries involved and belong with a tax adviser.
## What does a referral fee agreement look like in outline?
A referral fee agreement runs to about fifteen headings, in the order below. The list is an outline to adapt with a lawyer in the jurisdiction and the sector concerned, not a contract ready to sign.
- Parties: legal names, addresses, the capacity of each, licences held and their numbers where relevant.
- Purpose: the provider's services covered by the agreement and the referrer's limited role as an introducer.
- Definitions: client, affiliate, engagement, gross fee, net fee, registration date, protection period.
- Qualified referral: the new-client test and its look-back period, the conversion period, the services in scope.
- Registration: form of the notice, address for notices, response time, effect of silence, priority between referrers, expiry and renewal.
- Referral fee: rate or amount, base, deductions allowed, treatment of retainers, discounts and refunds, taxes.
- Repeat business: first engagement only, every engagement in the period, or a declining scale.
- Payment: trigger, number of days, instalments and deferred amounts, currency, method, late payment, clawback.
- Reporting and records: notice of each engagement signed with a registered client, a statement with each payment, a limited right to verify.
- Non-circumvention: affiliates, delayed signature, onward introductions, and the remedy.
- Role and conduct of the referrer: no authority to bind the provider, no negotiation, no advice, no act requiring a licence not held.
- Compliance and disclosure: lawfulness of the payment for both parties, who discloses the fee to the client, and when.
- Confidentiality and data: use of client contact details, consent of the client to the introduction where privacy law requires it.
- Term and termination: duration, notice, survival of the protection period and of fees already earned.
- General terms: independent contractor status, tax documents, assignment, governing law, dispute resolution, entire agreement, signatures.
The reporting heading deserves a second look, because a referrer cannot compute a fee from a base the referrer never sees. A workable clause has the provider confirm in writing when a registered client signs and state the fee invoiced and received with each payment.
## How does the computation work on a real deal?
On a business sold for $1,850,000 with a 6% success fee, a 30% co-broker share and a referral fee of 20% of the net fee, the referrer is owed $15,540. The steps show where each clause of the agreement enters the calculation, including a fee collected in two instalments.
From sale price to referral feeIllustrative: $1,850,000 sale, 6% success fee, 30% to a co-broker, referral fee 20% of the net fee received
Confirm the referral qualifiesThe owner was registered by email, accepted in writing, had no dealings with the broker in the look-back period, and signed the engagement inside the conversion period. All four tests are met.
Compute the gross fee6% of $1,850,000 is $111,000. This is the fee invoiced to the client, and it is not the base.
Deduct what the agreement allowsThe co-broker receives 30% of $111,000, or $33,300. The net fee is $111,000 less $33,300, which is $77,700. The agreement allows no other deduction.
Apply the rate20% of $77,700 is $15,540.
Follow the instalmentsThe broker collects 75% of the net fee at closing ($58,275) and 25% twelve months later ($19,425). The referrer receives $11,655 after the first and $3,885 after the second, $15,540 in all.
Send the statementEach payment goes out within the agreed number of days of receipt, with a statement showing the gross fee, the deduction, the net fee and the rate.
The same numbers can be turned into shares of the single payment the client makes. The referrer's $15,540 is 14% of the $111,000 gross fee, the co-broker's $33,300 is 30%, and the broker keeps $62,160, or 56%. Expressed that way, the three shares add up to the whole fee and can be fixed before the client pays.
That is the form a payment router works with. Shaka is one: each party's share is set as a percentage, each recipient can sign that share before the client pays, the client pays once, and every party is paid at the same moment in one transaction, with a final onchain payment that each of them can see. It routes the payment and never holds the funds, and a deal has at most 20 recipients. It carries out a split the parties have agreed; it does not replace the agreement, which still has to define the referral, the base and the term, and it does not answer the licensing question.
Whatever carries the payment, the definition comes first. Had the agreement said only "20% of the fee", the referrer could have read the base as the gross fee and expected $22,200. The $6,660 between the two readings is the cost of one missing definition.