The Fair Market Value of a Relationship
Slicing Pie uses fair market value as part of the formula for determining fair equity. I often get questions on how to value a relationship. Everyone on the planet will agree that relationships are important and valuable, but putting a fair market value on the relationship seems difficult.
Relationships are only valuable if they can be translated into money. This is business, after all, and money talks. Relationships can translate into sales, investments or partnerships that provide value to the organization.
In the Slicing Pie model, I encourage people to use discretion when providing slices in the pie for relationships. Someone who merely makes an introduction, for instance, may not warrant any slices. Someone who sets up meetings and helps negotiate a deal, on the other hand, may be entitled to slices.
In some markets an introduction may be enough. Trevor Ewen, author of Pear of the Week, a personal finance and investing blog, considers it standard practice to provide fees for referrals stating that “in my day job as a software engineer, we are usually willing to pay 5% of the client’s value for a successful referral resulting in a sale.” In other markets Ewen is more conservative, “in real estate, the terms are a bit softer.” Ewen recommends setting the terms upfront, “If fees are involved, they need to be discussed up front. I think it’s a little unrealistic to make a referral and then ask for money. It’s much better to state that any referral you make is worth X, and then others decide whether or not to work with you.” In most cases, discussing the terms before the deal moves forward will help avoid disputes later on.
In many cases, people provide referrals because it’s good business and good karma. Tracy Fuller, from Innovative Events, Inc doesn’t expect to be paid for introduction and thinks it’s good for business, “I just made a warm referral that is in the process of resulting in a $75,000 investment into a company to start franchising. If I didn’t make this connection it would never have happened. This is the company’s first investor in this project. I enjoy making warm referrals and helping others close sells. I have not been paid with dollars but certainly with good faith and return referrals. Being the go-to person puts me in the place of opportunity.”
Reciprocity, rather than a fee, is a common expectation of professional referrals. Robert Palidora, a financial consultant from Pennsylvania says, “our industry survives on referrals, we are taught to ask for them. There is no compensation expected or assumed. There is the assumption for a quid pro quo relationship.
When considering the fees, check what’s customary in your market. For employees, tapping personal relationships may simply be part of the job. Some jobs, like sales, carry a moderate base salary plus a commission. Other jobs, like CTO, may not warrant a commission or fee. Their fair market salary should encapsulate the fact that they have connections in the industry.
In Slicing Pie, when a relationship turns into a sale the person who makes the sale is generally entitled to an industry-standard sales commission. When a relationship turns into an investment, the person who closes the deal and is not otherwise compensated by the company, may be entitled to a finder’s fee. When a relationship turns into a valuable partnership, the person who creates the deal may be entitled t a percentage of the savings or sales generated as a result of the partnership as long as they’re not otherwise compensated.