[rails-business] Finder/referral fee for taking over clients

[wesgarrison]

(I wish I'd found this group a while ago! First time poster.)

I'm curious what people do when taking over a contract from someone
else.

A developer (let's call him Bob) came to me and said "Hey, I built
this app and I'm moving on. I'd like you to take it over. I'd like a
residual."

I have no problems with this since I have to do no marketing/promotion/
searching for said new client, but I have no clue as to what something
appropriate would be.

The client definitely wants more work done on the app, so there will
be revenue coming in from them, so what's a fair deal for the
referral?

Opinions and thoughts appreciated.

-- Wes

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[Philip Hallstrom]

On Apr 22, 2010, at 9:02 AM, wesgarrison wrote:

> (I wish I'd found this group a while ago! First time poster.)
>
> I'm curious what people do when taking over a contract from someone
> else.
>
> A developer (let's call him Bob) came to me and said "Hey, I built
> this app and I'm moving on. I'd like you to take it over. I'd like a
> residual."

Ask Bob what it is he wants. If he wants more than you can provide
then it's a no-go.

"residual" sounds like an ongoing thing. I've never been in this
situation, but I would much rather pay Bob a one time referral fee and
be done with it. Just seems cleaner that way.

> I have no problems with this since I have to do no marketing/
> promotion/
> searching for said new client, but I have no clue as to what something
> appropriate would be.
>
> The client definitely wants more work done on the app, so there will
> be revenue coming in from them, so what's a fair deal for the
> referral?

Find out what real estate agents and other folks like that get. 5%,
10%, of what you expect to make off it within a year maybe. Insurance
agents get the first month's premium as commission (I think)....
maybe you'll find a common theme in those markets.

I know that isn't much help, but there it is...

[Colin A. Bartlett]

In these situations, I believe strongly that unless the person is
providing ongoing value they should not be given an ongoing residual.
A sales rep usually receives an ongoing commission but he is often
providing a point of contact and otherwise putting value on the table
continuously.

For these things, I suggest either an up-front finders fee. Or a
commision that fades off over time. Depending on the scope of the
project an example might: 20% commission for the first 6 months, 10%
for the next, 5% of the next, and nothing after that.

Colin

[Greg Pederson]

I agree with Philip, ask your friend what he wants.  I also agree that an ongoing commission probably doesn't make sense either.  When does the line between the original developer and original project get crossed or go away?  If you're paying a commission for ever I think you'll end up paying something unnecessary.   

Having said all of that my take is that 10% is the maximum.  You have to keep in mind that it is a lead and work, but if your friend is stepping out you'll have to absorb client mgmt, accounting, project mgmt, etc, etc.  If I were in this situation I'd try to get an semi accurate guess of the amount of immediate work required and either offer a one time fixed amount (ie 10%) based on the anticipated work.  Or 10% for something like 3-6 months, then 5% for the next 3-6 months. 

Really you should find out what is a win-win for all involved.  If that can't happen you may consider taking a pass on the project.  It might be hard to walk from work, but keep in mind that if negotiations go bad or one of you end up feeling like you got the short end of the stick it could have negative consequences on your friendship.

Greg Pederson Founder and Technical Director 407.385.0098 office 888.308.9695 toll free www.NsightDevelopment.com

Contact Me LinkedinFacebookTwitter

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[Jaime Bellmyer]

I haven't personally experienced this, but it sounds like not very
many others have either. So I'll toss my 2 cents in :)

I'd be inclined to offer 10% if the first contract you sign with the
new client. I'd probably go up to 20% if asked. That first contract
is what the other developer provided you. After that, any further
business you do with the client is purely based on your own merit, and
I think you're entitled to 100% of that revenue moving forward.

Basing the fee on the first contract makes sense to me because that's
all you're "guaranteed" to get out of the deal yourself. If they just
want to sign a 1 month trial agreement at first, you shouldn't have to
agree to ongoing fees. Your associate didn't bring you *that* great a
contract.

[Evan Dorn]

On Apr 22, 2010, at 1:07 PM, Jaime Bellmyer wrote:

I'd be inclined to offer 10% if the first contract you sign with the
new client.  I'd probably go up to 20% if asked. That first contract

is what the other developer provided you.  

I personally prefer a time-based commission or finders fee; we usually do the first six months.   When your development is agile and ongoing, the "first contract" can sometimes turn into most of your work for a year or more as the client makes new requests.   A fee for a period of time is much less likely to turn into a interminable impact on your bottom line.

All that said, I'm a bit surprised to see rates as high as 20% for a finder's fee, especially for a one-off situation of a developer handing you his old job.   Do you mean 20% of the net profit, or 20% of the gross income from the client? If it's the latter ... that's pretty astonishing to me.   20% of the gross could be a severe impact to your profits by the time you pay your developers and all your expenses.   Sometimes, 20% is what's left after expenses.

One other thought: avoid being on the other side of this transaction.   If you are letting go of a client (for whatever reason), the client should find the new developer, not you.   If you interview or recommend a new developer to them, you could end up with liability problem if the new developer performs poorly.   

Evan

Evan Dorn, Ph.D.

Owner and Lead Developer

Logical Reality Design

http://LRDesign.com

[wesgarrison]

I've considered a cap on length and/or a maximum amount paid. I'm also
going for simple, so changing percentages over time is just more to
keep track of. My thoughts were something like X% of billing for N
months, settled up once in the middle and once at the end. I'm just
curious what appropriate values of X and N would be.

I tend to shy away from a one-time fee because I'd hate to pay for a
lead that didn't cover my expense to get it. "Bob" agrees and I've got
no problem with paying him more over the long run if I bill more.

@Phillip: I see your point. What would you consider an appropriate
fee, then? Some percent of expected billing over the next few months?
I'm curious what you think.

@Phillip, @Greg : Well, I did ask him, and he said "Uh, I dunno what's
appropriate", so now I'm asking y'all what you think is appropriate.

@Greg: It's a full handoff, not a partial I'm-still-working-a-few-
hours or anything.

@Evan: I believe Jaime was talking about a one-man shop, where he
doesn't have direct outsourcing or employee expenses, so 20% would be
a lot more palatable in that situation.

-- Wes

[Greg Pederson]

I'd offer 10% for 6 months then, assuming it'll be an ongoing customer.  If at the end of the year you feel the project has been more fruitful and smoother than you had expected you could give your friend a bonus or take him to dinner, for drinks or give him sort of thank you gift.

Again, this assumes that all your friend is doing is giving you a lead.  The above numbers could go up if your friend is also giving you some sort of structure for this client...ie billing, contract, project mgmt, etc.

Good luck.

[Philip Hallstrom]

It's hard for me to say what % I'd give. I don't think I'd go beyond
10%. My real estate friends don't get anywhere close to that. But I
also don't have any idea how big a contract this is to you, or what
level of hand off you're getting. If Bob "sold" the client on you
then that's obviously worth more. If it was more of Bob saying "Hey,
you should talk to this guy. good luck" and you had to sell yourself
then it's obviously worth less.

Whatever you do... if it's ongoing, Bob doesn't get paid until you get
paid.

Also... to Greg's second point... you can always give him more later.
I read once about salary negotiations for full time employees... the
HR guy said if you've got $90K to work with and the person accepts for
$85K, call him the next day and say "hey, we really like you, we're
bumping you to $90k". it costs the company *nothing* in the scheme of
things, but it really makes the future employee feel good.

My only experience with this was a referral in the form of "i dunno,
maybe talk to philip". 3 months later I had a contract. I sent him a
reasonably sized gift cert to amazon. He loved it -- because he
expected nothing.

Good luck!

>> rails-busines...@googlegroups.com<rails-business%2Bunsu...@googlegroups.com
>> >
>> .

[wesgarrison]

Very good points.

In this case, this is an existing, happy client with ongoing work.

Bob just has too much and has to pare back.

The real estate comparison (6% in my state) is a good starting point
too.

Thanks!

-- Wes

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[Steven Talcott Smith]

I paid 10% for one year, once, under a referral arrangement with
someone who handed me a large client who needed ongoing support with
an existing codebase. (approximately 40 hours per month)

You can only pay 10% if the person bringing the business sold the
client on a high rate that leaves room for them to receive their
commission. After six or eight months, the client cut back the hours
due to cash flow problems and flagging investor support.

This is why a residual arrangement contingent on receipt of client
payments is a better idea than an up front commission.


Steven Talcott Smith
Talcott Systems, LLC
Boca Raton, FL

[Ryan Waldron]

On Thu, Apr 22, 2010 at 8:38 PM, wesgarrison <wes.ga...@gmail.com> wrote:
> I've considered a cap on length and/or a maximum amount paid. I'm also
> going for simple, so changing percentages over time is just more to
> keep track of. My thoughts were something like X% of billing for N
> months, settled up once in the middle and once at the end.  I'm just
> curious what appropriate values of X and N would be.
>
> I tend to shy away from a one-time fee because I'd hate to pay for a
> lead that didn't cover my expense to get it. "Bob" agrees and I've got
> no problem with paying him more over the long run if I bill more.

For what it's worth, I want to +1 the notion of a one-time, or at
least a capped, referral amount. Your friend may have intended some
ongoing thing, but that's an entanglement of interests that neither of
you should have time for. If Bob is being paid based on what the
revenue you get from this client, then Bob has a legitimate interest
in knowing how much you're making, for as long as he is expecting a
referral.

That would cause trouble, sooner or later, and if Bob's no longer
involved with that client, he shouldn't have any need to know what
you're making on it years later.

If you managed to negotiate a higher rate, would Bob's residual go up?
If you manage to get a fixed-price contract and then through your own
sheer brilliance, deliver it in half the time, does Bob get the
benefit of that forever?

I think referrals for occasions like this are a great thing as long as
they don't become long-term complications.

That said, I've seen this done from 5-10% . Higher than 10% would be
hard to justify, because you need to run your own consulting as a
business, and that fee comes directly from net profit.

As for how long, it depends a little on how long a commitment you're
receiving from the customer, as well as the length of the work cycles
you're going to be delivering. If the particular development project
you're taking over will last another 12 months, then it might make
sense to stretch Bob's cut out that long.

But if you're doing a 3-month cycle, and then there's going to be a
different project from that same client for 2 months, then another
3-month, etc., I'd suggest trying to get Bob satisfactorily
compensated within the first couple of cycles (~6 months).

> @Phillip: I see your point. What would you consider an appropriate
> fee, then? Some percent of expected billing over the next few months?
> I'm curious what you think.

One more thing am I'll shut up again. :) If you think you have a
pretty good handle on the maximum billing you'll be doing over the
next 6 months for this customer, and you can get Bob to accept X% of
billing, then that's probably good for you, since it lets Bob share
your revenue risk.

But if the amount required by this client could vary a lot --
particularly if it could put a serious strain on your ability to
deliver it all -- then you probably don't want Bob to get a big
windfall because he suckered you into a death march. :)

Good luck, though!

p.s. - I wonder if "Bob" reads this list?

[wesgarrison]

> One more thing am I'll shut up again. :) If you think you have a
> pretty good handle on the maximum billing you'll be doing over the
> next 6 months for this customer, and you can get Bob to accept X% of
> billing, then that's probably good for you, since it lets Bob share
> your revenue risk.

This is a longer term client, so we decided on 6% for six months.
Monthly check cuts for the first couple months based on an estimate
and then we'll adjust as we get some real numbers.

> p.s. - I wonder if "Bob" reads this list?

I don't believe so, but I mentioned this thread to him so he may
have checked it out.

Thanks for the replies, everyone!

-- Wes Garrison

[David Appelbaum]

Instead of charging for referrals, consider the lean-forward approach of making referrals for free, then selling them on the producer resource.
Earn some trust and create some goodwill, and then maximum the value of your business relationship, rather than trying to make a little money upfront while doing as little as possible.

Ryan pretty much nailed it.

--
David Appelbaum
dappe...@gmail.com
213.453.8697