Referral agreements are a powerful way to grow your business by leveraging relationships to bring in new clients. Whether you’re receiving referrals or sending work to a partner, a well-drafted agreement ensures both sides are compensated fairly and that expectations are clear.

Without careful structuring, referral agreements can lead to disputes, overpayments, or unexpected obligations. What triggers payment? How much? For how long? Here’s what you need to consider before signing a referral agreement to make sure it works for your agency.

Duration of Referral Fee Payment Obligation

Once you make a successful referral, the referral agreement must clearly define the duration of the payment obligation. Without a clear time limit, you might be obligated to continue paying referral fees years after a client was introduced — even if the referrer hasn’t been involved in the relationship since the initial introduction.

We commonly set the payment term to six to twelve months or the duration of the first project. When the term is time-based (versus project-based), be sure to specify when the time begins to run. Is it twelve months from the date of the referral? When the first contract is signed? When the first payment is made?

Factors in Setting the Referral Fee

Typically, referral fees are based on a percentage of revenue, but defining ​“revenue” is crucial. Many agreements avoid using top-line revenue and instead use a defined concept of ​“net revenue” excluding credits, refunds, and pass-through costs. This ensures that referral fees are calculated on actual earnings of your agency. 

Referral fees are generally not calculated on net profit because profitability reflects how the agency receiving the referral runs its business rather than the dollar value of the referral itself. A party making referrals doesn’t want their referral fee cut simply because their referral partner carries a lot of overhead. 

Consider whether the same percentage should apply across all types of work. Some services are high-margin, while others involve significant expenses. A flat 4% referral fee might be reasonable for strategy work but excessive for media buying or outsourced production. Fees should be considered in light of the nature of the revenue and the referral relationship.

Similarly, in a mutual referral relationship, don’t assume that the same percentage should apply to both parties. Each party may have a different line of business with different margins and scale. If one party is referring high-value, long-term clients while the other is sending over lower-value, one-off projects, applying the same referral percentage to both may not be fair.

Mutual or Unilateral

Referral agreements can be unilateral or mutual. Unilateral agreements means only one party is making referrals and earning referral fees. This is common when one business is in a better position to send referrals than the other — for example, a software development agency referring work to a design agency, but not the other way around.

Other agreements are mutual, allowing both parties to refer work and earn fees. If you expect referrals to flow in both directions, a mutual agreement is a good structure — but the percentages or terms do not need to be identical. As discussed above, each business should negotiate terms based on the value of the referrals they’re providing and the effort involved in securing new clients.

If the agreement is mutual, determine whether each party is realistically likely to send referrals. If the referral flow is expected to be one-sided, a unilateral structure may be more appropriate.

Qualifying a Referral

Not all introductions deserve a commission. Each party’s typical sales cycle and other competitive factors will dictate the level of effort required to qualify as a referral. In some instances, merely passing along a name can be enough to lead to a sale. In situations with integrated services, the referring party may need to actively participate in the sales process for some time to earn the sale. Some agreements use a tiered structure: a lower percentage for passive introductions and a higher percentage when the referrer plays an active role in closing the deal. 

Even though ​“sales efforts” can be somewhat subjective, spending some time clarifying this upfront will help set expectations and prevent disputes. 

Collected vs Billed Revenue

A critical term in any referral agreement is whether referral fees are paid on collected revenue or billed revenue. The referring party will argue that billed revenue is the better measure since the referrer has no control over the receiving party’s collection efforts. The party receiving the referral will prefer paying on collected revenue to avoid having to pay fees on money that a client never actually pays. Despite these competing perspectives, our experience is that most referral agreements pay based on collections rather than billings.

Your agreement should also define when referral fees are paid. Will they be paid at the end of each month, quarter, year, project completion? We generally recommend making payments at the end of the end of the payment term (e.g., the six- or twelve-month period). This ensures that credits or discounts applied later in the term are factored into the final payment. 

Termination

Typically, either party can terminate a referral agreement at any time. Once the referral agreement is terminated, referrals after the termination date won’t trigger a referral fee (even if the referral turns into a client). But termination does not erase the obligation to pay referral fees on qualifying referrals made before termination. If a referrer brings in a client before termination, they should still receive their agreed-upon referral payments for the defined period.

Protecting Your Client Relationships

Referral agreements give another business access to your potential clients, and you don’t want that to lead to poaching. Consider whether a non-solicitation clause is appropriate to prevent referrers from taking clients they introduced (or any of your other clients) and steering them elsewhere.

Conclusion

A well-structured referral agreement ensures fair compensation for both parties while protecting from unnecessary risk. By carefully defining referral fees, payment terms, and client protections, you can create a partnership that benefits everyone involved.

Before signing a referral agreement, ensure the terms reflect your business reality, not just a standard template. The right structure can turn referral relationships into a reliable, profitable source of new business. Need help drafting a referral agreement for your agency? Look us up.