Finders Fees 5

[zoobi]

Hi all,

I've searched for information regarding a partnership and finders fees being applied to work brought in by either partner.
I found and have read this thread -

http://www.eng-tips.com/viewthread.cfm?qid=260385

My situation is slightly different so would like your opinions on this please.
My business partner and I are in the process of setting up a company and are currently documenting the particulars.
Everything is fine but for the issue over the finders fee.

Our situation differs from the above thread in that my partner has a full time job(not in the same field) and I don't. He has proposed a 20% finders fee, 20% for the work on a project and 60% going into the company to build some capital.

Now I tend to side with the above thread in that as a partnership its 50/50 and everything is for the benefit of the company, not the individual.

I guess my underlying issue with the finders fee is that in my mind it has the potential to be more beneficial to him as he can bring in projects and because I will have more time available I will land up doing majority of the work. My 20% then seems quite a task to acquire than his 20% as the finder.

Any advice on this or is my concern unfounded??

 

[casseopeia]

Just so I'm understanding this correctly, you are saying that you only need one fifth of the overall fee to do the work and the rest is pure profit?

What if your partner brings in the work at a less-than-adequate fee, i.e. underbids the job. You're stuck doing the work with insufficient funds and he gets to collect the 20% cream right off the top and keep his day job.

I'll wait for something that sounds reasonable, but I'll be priming the cannon...

"Gorgeous hair is the best revenge." Ivana Trump

 

[zoobi]

Thanks for the reply casseopeia.

You see we're currently figuring out how to structure things financially taking into account our differing situations. We are both in agreement that whatever we decide on will be in force for 6-12months so that adjustments can be made as things progress.

I'm not saying I will be doing all the work, just that in my mind I will most likely land up doing the majority most of the time and this is what irks me about the even proportion of finders fee to work fee.

My thinking is to lower the finders fee drastically to say 5% and take the extra 15% into work fee.

We're both inexperienced in terms of financial models so any advice or experience that can be offered here would be greatly appreciated...

 

[casseopeia]

Put real numbers into your business model. Let's say you have a project that will take 10 hours to complete and that you want to make $30/hr. In your first model, you will have to charge you client $1500 where $300 (20%) goes to your partner, $300 goes to you, and $900 gets banked to grow the company. From the client's perspective, he's paying $1500 for a $300 job. That's a tough sell.

A better model would be to establish a pay rate for yourself and the fee goes to pay you until you are finished with the job. Any extra (profit) gets divided up 20% to each you and the partner and 60% to the company.

Let's go back to that $300 job. Let's say your partner manages to sell a $300 job for $400 because of his charm and charisma. You take $300 to pay yourself to complete the work. That leaves $100 in profit. He gets $20, you get $20 and you bank $60 to fund the company. This would be far more realistic.

"Gorgeous hair is the best revenge." Ivana Trump

 

[fasboater]

I believe Cass is correct. The only thing I would add is there is nothing wrong with paying a finders fee or a sales fee. I assume your able to make the finders fee as well. However you need to pay yourself hourly for the work you are doing(a sum that you feel is reasonable).

So it would work like:
Some percentage would be paid to the salesperson
Whoever did the work would get paid hourly
What you profit would be divided however you determine equally

However I think a 20% fee is really high. I have seen that fee as low as 1% and 2% of the net profit. I personally pay 10% of my net profit which I think is extremely high. But I was using it as an incentive to get a couple people going after projects for me.

http://www.bowerseng.com

 

[rowingengineer]

I don't like the idea of the finders fee at all. from my perspective it will get very confusing for projects once you are established.

http://www.nceng.com.au/

"Programming today is a race between software engineers striving to build bigger and better idiot-proof programs, and the Universe trying to produce bigger and better idiots. So far, the Universe is winning."

 

[zoobi]

Thanks for both of your replies. fasboater I am able to make the finders fee as well. Its just with our situation I see the finders fee a little more geared to support my partner as he won't be able to commit as much to the work portion.

So in combining your responses a possible 'best' way forward would be -

A lower finder's fee (I'm thinking 5%)
An hourly rate for work done on a project (would be the same for myself and my partner)
A percentage of each project gets pumped into the company
And any profit balance over that gets split between both of us

Another aspect I have thought of is the administration side of things which I have started to do and will continue to do. Have either of you got any experience tying some compensation to administrative tasks? Or would the same hourly rate apply maybe?

Thanks for your guys' help, gaining a bit more clarity on this which is a relief.

 

[zoobi]

rowingengineer : I'm not averse to the idea of the finders fee in general but think there should be a time limit to it so that it functions as incentive to get the company up and running and then falls away once things are ticking.

On a side note. What if the finders fee was to be dropped out of the equation all together and at the end of a financial year a certain amount of company funds are paid out to the partners as a form of dividends. This amount is then split based on the proportion of work brought into the company by each partner. So if I brought in 6 projects and my partner 4 then I get 60% of the amount and he gets 40%. Would this possibly be a better way? This way seems to me that funds are not deducted from the company so early so as to potentially cripple its development as may be the case with the finders fee situation.

 

[fasboater]

I guess cutting to the chase your trying to run a business. I see a finders fee as a function of the business, not a function of the partnership. Therefore the finders fee should be included in your pricing. You can hire a sales guy to do the same thing, it doesn’t have to be your partner, that is just what he bring to the table.

I do think you should be paid a “reasonable” amount of hourly wage for your administration duties. There is a lot there keeping up on accounting, licenses, etc. That is why you have business income in the first place.

Again you are running a business. So your expenditures should be paid out as they are due, however your percentages as owners should not be taken until the year end is finished to be sure you have some adequate amount financials on reserve.

For example I pay for outside detailing. When I enter into a contract for a project I have a detailer that will detail my project and I will pay him within two weeks of his finals prints. It may take 30 days for me to get paid (I just had a project that took me four months). I want to have adequate capital to be sure if something goes crazy my business isn’t damaged do to not having the funds.

http://www.bowerseng.com

 

[ajack1]

Zoobi, personally I think what you are proposing is crazy.

You either want to be 50-50 partners or you receive an amount of money or a percentage of money pro-rata to the amount of hours spent at the company.

I don’t necessarily agree that you need to wait to year end to take money out as you will soon learn the amount of float you need to see you through the highs and lows that is cash flow. However I would suggest that you don’t take anything out for at least six months. Much easier for your partner than you if they have a full time job and you don’t. Also speak to an accountant; in the UK there is a big difference in the amount of tax and national insurance you or the company pays depending on how you take your salary or dividends.

If you want to pay extra for a finder’s fee, why not also pay extra for book keeping, IT, invoicing, and all the other non billable things you will end up doing? That way you can spend all day deciding how you dish out a percentage of nothing as there would be no money left to actually reward the paid work that you will need to do.

 

[MacGyverS2000]

I think I would have a difficult time starting a business with anyone who cannot devote a large portion of their time to it. If I'm doing all of the grunt work, the "partner" is nothing more than a glorified salesman. And why should I pay a salesman anything more than a finder's fee, what entitles them to a portion of my year-end profits?

Dan - Owner

http://www.Hi-TecDesigns.com

 

[zoobi]

See his thinking is he has more contacts than I and will bring in more work. My skill-set in terms of the actual work is stronger than his. So those are our different standpoints. I am asking for more fee allocation to the work/labour portion of a project and he is set on keeping it as he has proposed.

I proposed a shuffle of the figures like so -

10% finders fee
30% work remuneration fee
60% company capital

I believe in terms of a finders fee that's a little more realistic and most importantly the work portion of projects will have a healthier amount of compensation.

I dunno this is driving me nuts wrangling with figures,etc!!

He is not prepared to budge so I am giving myself this weekend to mull over it.

 

[MacGyverS2000]

Of course he doesn't want to budge... he doesn't have to do any work, he just hands you jobs and gets cash in return. Yes, he should be compensated for his contact list. But what happens when a year down the road you're making plenty of contacts on your own and getting work without his list... he still gets cash from you doing the project work, but he is no longer contributing (or he no longer needs to contribute).

Sounds like a very lopsided arrangement in the long run... even in the short run, it appears to favor him a bit more, but you'll have to make that call. I would suggest keeping it a non-partnership and give him a generous 20% finder's fee. That would give you access to his contact list until you're making money and contacts of your own, but it doesn't force you to pay his way without benefit.

Dan - Owner

http://www.Hi-TecDesigns.com

 

[zoobi]

Ok after chatting throughout today and throwing around ideas we haven't really gotten anywhere.

He says he will do 50% of the work in the evenings and on weekends. I can't see this being possible and even if it was it would delay project times somewhat.

However, if this was the case and the work is split equally 50/50, then is the model proposed just and fair as a business partnership model?i.e. does it change things or as a business model is it still flawed.

What we have agreed upon should we go ahead is that the finders fee will be for a period of one year and then fall away.

 

[casseopeia]

What happens when you get return business because of your work from a contact that started out on your partner's list? You're doing all the work keeping the Client happy and your partner is on vacation in Tahiti using his finders fee to buy umbrella drinks on the beach.



"Gorgeous hair is the best revenge." Ivana Trump

 

[FixedEarth]

Why would a partner be paid a fee to keep the firm alive??

 

[ajack1]

Zoobie you are getting some very good free advice here from people that run or have run their own businesses, I am not sure how many times you need telling that what you are thinking of getting into is basically stupid. Maybe you need to get burnt to find out that fire is hot.

20% is a very high finders fee for a freelance sales rep, for a partner in a company it is just plain stupid. Think about it for one minute, there are many things that need doing to run a business which one of you is going to be doing them whilst the other one is getting an extra 20% finders fee?

The idea that your partner will do 50% of the work at evenings and weekends is laughable. Starting out one of your edges will need to be that you bend over backwards to please clients and deliver good quality work on time and believe me dead lines are always tight and nearly always deal breakers. If a client rings up and wants to speak to the person doing that project and you say he will ring you back sometime after six or on the weekend, how long do you think you will keep that client?

I am not sure if your potential partner is just trying to fleece you or genuinely has no idea what they are doing, but either way think very long and hard before you enter into this, you will get burnt.

 

[cvg]

typical engineering business (% of net revenue)

100% net revenue
45% payroll
55% gross margin
40% admin and marketing
2% depreciation and other expenses
12% income before taxes
25% taxes (effective rate)
10% net income

So, if you take a salary, then you could expect to have about 10% of your net revenue left to put into the company bank account. Or you split it at the end of the year as a bonus.

Of the 40% for admin and marketing, the majority is for admin costs. You might be able to save a bit here since your company is small. There might be 10% left for marketing.

 

[RacingAZ]

What you described is not a business partnership at all. In a true partnership, both should have the same interest. Which is, for the good of the company. If you can't agree this early how to divide the money, I'm sure you'll end up hating or resenting each other down the road.

I've seen this before where one partner would only do only 1 thing and the other gets stuck doing everything.

Ajack1 is into something. I'd say you're very naive with your understanding of how a business works. There are a lot of non-revenue generating tasks associated with operating a business. Who's going to be doing the accounting, invoicing, CRM, returning clients' calls, etc? There are a lot of things involved in a real business, not just getting the projects and doing the engineering.

Since you've posted a question, here are 2 simple solutions that I can think of.

1. The person that brought the job forfeits the finder’s fee back to the company pot if he ends up not doing the actual work. He would still get paid at the back end once you split the company profits but at a reduced rate since you'll be splitting the money.
2. Or if you can live with the 20% finder's fee, the person doing the design work gets to charge the real rate to finish the work. Not just 20% but for the actual time spent doing the work.

Not necessarily ideal options and for me, I'll just go on my own and offer him a finder's fee, but not at 20% rate though.

If you cannot market and find projects on your own, you have no business starting a business. Not trying to be obnoxious but this is the reality when you go on your own.

 

[DRWeig]

Finder's fees are what salesmen-for-hire get paid, not partners.

I agree with RacingAZ. I'd set my business up alone and tell the other fellow to do some selling for 2-5 percent (depending on job size and profitability), not 20.

Good on ya,

Goober Dave

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