What is a Finder’s Fee?
What is a finder’s fee? When used correctly, finder’s fees benefit all parties involved. Often, without an intermediary earning a finder’s fee, a transaction between two parties would not occur. This post explains what a finder’s fee is, how it works, and includes a finder’s fee agreement sample.
Finder’s Fee Meaning
A finder’s fee, also known as a “referral fee” is a way for one party to compensate another for a referral. The earner of the fee, or “finder,” typically provides an introduction of two parties (often a buyer and a seller) who did not previously know each other. Because the introduction is potentially valuable to at least one party, one or both of the parties are willing to pay a fee for the introduction. Hence the term Finder’s Fee.
Most finders’ fees are contingent upon some event or transaction actually occurring. In other words, the finder is not compensated until/unless the parties find the introduction valuable and complete a transaction. Upon the official transaction, the finder earns the fee.
Finder’s Fee Agreement
While it is possible that a finder could have a verbal arrangement with another party, they are usually documented in a written contract. For example, if you have a friend who would like to sell his mint condition 1972 Chevrolet Corvette, he might agree to give you a $5,000 finders fee if you bring him a qualified buyer and the transaction closes. A transaction like this might be a handshake agreement and there is no need for a written contract. On the other hand, if your neighbor wants to sell his $100 million company, and you know a potential buyer, finalizing the terms of your engagement in a written contract is an important step in the process.
Who Pays the Finders Fee? The Buyer or the Seller?
Either one! The Finder typically enters into a contract (“Finders Fee Agreement”) with either the buyer or the seller. In rare cases, the Finder might enter into a contract with both the buyer and the seller.
What Is Included in A finder’s Fee Contract?
Please see the sample Finder’s Fee agreement at the end of this post. A finder’s fee contract includes key provisions including but not limited to:
Names of all parties involved
Length of the contract
What services are being provided and what has to occur for the fee to be earned
Confidentiality and non-circumvention
How is the fee calculated and paid
How are Finders Fees Calculated
Finders Fees are negotiated between the parties in the agreement. The fee is generally aligned with the value of the introduction and the value of the transaction. When selling a business, the Finder’s Fee is frequently based on the Lehman Formula. See the example below for a Fee Agreement that utilizes the Lehman Formula.
Does Private Equity Pay Finders Fees
Yes! Private equity firms regularly enter into buyer paid fee agreements that are are paid upon a successful transaction closing.
Finder’s Fee Agreement Sample
Note: This is an example of a Finder’s Fee, and it is not intended for your use. 1719 Partners is not providing legal advice. This sample agreement uses a Lehman formula.
This Fee Agreement (“Agreement”), dated as of [insert date here], sets forth the terms and conditions upon which [insert finder name or legal entity here] (“Finder”) shall act as non-exclusive finder for [insert buyer or client name here](“Client”) and/or its assigns for two (2) years from the date hereof (“Term”). In such capacity, Finder shall introduce representatives of the Client to the owners and senior executive officers of [insert target company name here] (“Target”)and shall obtain and provide information regarding the business affairs and prospects of Target, including detailed financial statements and any other information reasonably requested by the Client, in connection with any due diligence investigation Client may undertake (the “Services”).
Client hereby engages and agrees to cause Finder to be compensated if Finder’s introduction to Target during the Term results in Client purchasing 25% or more of the capital stock of Target, or all or substantially all of the assets of such candidate, within 24 months of the date Finder introduced such qualified investment candidate to Client (a “Transaction”).
In consideration of Finder’s provision of the Services, if a Transaction is consummated, a finder’s fee (the “Fee”) shall be paid, or caused to be paid, by Client to Finder on the day of the closing of the Transaction, such Fee to be based on the Purchase Price (as defined below) paid by Client in connection with the Transaction. Such fee shall be computed as follows:
5% of the first $1,000,000 of the Purchase Price, plus
4% of the next $1,000,000 of the Purchase Price, plus
3% of the next $1,000,000 of the Purchase Price, plus
2% of the next $1,000,000 of the Purchase Price, plus
1% of the balance of the Purchase Price.
The “Purchase Price” is defined as the aggregate consideration (whether in the form of cash, assumed debt or other non-contingent or non-deferred contribution of value) paid by Client to acquire its equity, debt or other interest in Target. In the event that any portion of the consideration paid by Client to acquire its equity, debt or other interest in Target is contingent or deferred, such consideration will be included in the Purchase Price.
For purposes of this Agreement, the term “qualified investment” shall mean an investment (i) in which Client or its affiliates obtains control of a corporation, limited liability company, partnership or other entity over which it did not have previously have control; and (ii) with respect to which Client has made no contacts with any parties related to such investment, has taken no steps to consider or pursue, has not learned of through any source other than Finder, and about which Client has no information. For purposes hereof, “control” of an entity shall mean the ownership of more than 25% of the equity securities of such entity, or the power to direct or cause the direction of the management and policies of such entity. In the event that Finder discloses to Client the name and address of Target that Client determines is not a qualified investment candidate, or if Client is already aware of Target, Client shall so notify Finder within five (5) business days of such introduction.
During the Term, the relation between Finder and Client is that of unaffiliated third parties. Finder and its officers, directors, employees and agents shall, under no circumstances, be deemed agents, employees, partners or representatives of Client.
Each party shall bear its own costs and expenses incurred in connection with the undertakings contemplated by this Agreement.
This Agreement shall be construed under the laws in the State of [insert state here].
This Agreement may be signed in counterparts, each of which shall be an original, but all of which together shall constitute one agreement.
IN WITNESS WHEREOF, the undersigned have executed this agreement on the day and year first above written.
Client: Finder:
What is a Finder’s Fee: In Short
In summary, a finder’s fee is a way to reward an intermediary for linking together two parties who otherwise likely would not have met. It incentivizes the “finder” to forge rewarding connections, as the finder is not compensated until the deal closes. If you have any questions on how finder’s fees work in private equity, 1719 Partners is happy to answer them. Simply contact us here.
