Finder's fees: Overview, definition, and example
What is a finder's fee?
A finder's fee is a commission or payment made to an individual or company (the "finder") for locating and introducing a potential client, partner, or investment opportunity to a business or organization. The finder’s fee is typically a one-time payment or a percentage of the deal value, and it is paid once the referred party successfully engages in a business transaction or agreement. Finder's fees are commonly used in industries such as real estate, mergers and acquisitions, and venture capital.
For example, if a real estate agent introduces a buyer to a seller, the agent may receive a finder's fee for facilitating the connection, especially if the deal is closed.
Why are finder's fees important?
Finder’s fees are important because they incentivize individuals or companies to identify potential business opportunities, customers, or investment deals. They can be a cost-effective way for businesses to access new markets or opportunities without the need for extensive marketing or sales teams. For the finders, these fees provide a monetary reward for their efforts in identifying and connecting parties that may benefit from each other’s services or products.
For businesses, using finder's fees can expand their reach and allow them to tap into networks or markets they might not have access to otherwise. For individuals or companies acting as finders, it offers a way to earn income by leveraging their network or expertise.
Understanding finder's fees through an example
Imagine a startup, TechInnovate, looking for an investor to fund their new product development. A consultant, John, who has connections with potential investors, introduces TechInnovate to a venture capital firm. Once the investment deal is finalized, John receives a finder's fee based on the amount invested. If the venture capital firm invests $500,000, John might receive a finder's fee of 5% of the deal value, equaling $25,000.
In another example, a commercial real estate broker introduces a buyer to a property seller. After the property sale is completed, the broker receives a finder's fee, typically a percentage of the sales price, for connecting the buyer and seller.
An example of a finder's fee clause
Here’s how a clause like this might appear in a contract:
“The Company agrees to pay a Finder’s Fee of [insert percentage] of the total transaction value for any successful introduction of a potential investor, client, or partner. Payment of the Finder’s Fee will be made within [insert number] days after the deal is finalized and the payment is received.”
Conclusion
Finder’s fees are payments made to individuals or companies for connecting parties to potential business opportunities, such as clients, investors, or partners. These fees are common in industries like real estate and venture capital and serve as an incentive for individuals to use their network or expertise to facilitate deals. For businesses, finder's fees are a useful way to expand opportunities without incurring the full cost of dedicated sales or marketing efforts. For finders, it offers a commission-based income for leveraging their connections.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.