Definition of a Finder's Fee

Written by kofi bofah
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Definition of a Finder's Fee
Finder's fees are payments to third parties for bringing buyers and selles together.

Finder’s fees are payments to third–party individuals that broker deals between buyers and sellers. The arrangements are applicable to particular transactions, and fees are calculated according to the size of the deal and the work involved pertaining to the third party. These lightly regulated agreements may also be accounted for by different methods based on the type of business, and the ambiguity involved generates a distinct risk profile.

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Transactions

Buyers and sellers may not have the time, energy or aptitude to seek out each other. The finder's role is to form relationships with both parties and work to connect the individuals. The finder may arrange for a phone call or a meeting between the buyer and seller to close business.

Finder’s fees are typically applicable to unique deals that feature mergers and acquisitions, collectibles, hard-to-find assets and the sales of specialised equipment. These investments rarely trade on organised markets, and the pool for available prospects is always minimal.

The legality of finder’s fees pertaining to licensed professionals of highly regulated industries such as finance, real estate or medicine varies from state to state.

Calculating Payment

Payment for finder’s fees includes meals, event tickets, cash and equity stakes. Finder’s fees may be calculated as a flat fee or by percentages. The two parties can negotiate between a percentage of sales or profits to set payment.

Finders that merely make informal introductions or suggest phone calls may be rewarded with a simple pat on the back. The amount of payment coincides with the level of involvement that the third-party networker shows in terms of closing the deal. Finders often expect a 1 per cent payment of total assets for arranging large deals, usually described as when hundreds of thousands, or millions of dollars worth of unwieldy assets are exchanged.

Agreements

Finder’s fees may be articulated by informal handshake agreements, or legally binding contracts. Again, the agreement is contingent on the scope of the deal. Contractual arrangements should define the work involved, payment methods, fee calculations and a time frame for actually closing the transaction.

Accounting

Finder’s fees are usually expensed as sales general and administrative fees. According to Michael Savoy, an accountant, these expenses are similar to sales commissions and add nothing of value to the product. Finder’s fees are not to be confused with cost of goods sold. Listing finder’s fees as cost of goods sold will have an adverse effect on the business’s gross margins, which may impact your ability to qualify for a bank loan.

Still, businesses that pay out finder's fees regularly may sometimes elect to expense these agreements as cost of goods sold.

Risks

Risks pertaining to finder’s fees are associated with the various structures and unwritten agreements based on “trust” of the arrangement. Business and social relationships can deteriorate due to misunderstandings related to actually closing deals, payments and timing. Further, finder’s fees may be illegal in some cases, as the differences between these payments, goodwill, influence and outright bribes are open to interpretation.

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