A “referral sale,” in legal terms, takes place when the contractor promises something to the buyer for referring other customers to the contractor. The referral fee can be cash, a rebate, a free dinner, or a discount, for example. But, offer one this way and you may find yourself in legal hot water: “Mr. and Mrs. Jones, if you buy carpet from us now, we will give you $100 for every additional customer you send our way who buys carpet from us as well.”

In most states, these types of induce-to-buy referral sales are prohibited usually under the state’s home improvement or door-to-door sale statutes or sometimes under the state’s consumer protection or unfair and deceptive acts and practices (“UDAP”) statutes. But, if the sale has already closed, and you then offer the buyer some type of compensation for referring other potential customers to you, this would generally be acceptable under most state laws.

If you use a post-sale referral, take measures to acknowledge this in whatever documentation is being used to reflect the referral agreement (e.g., a coupon, certificate). A follow up “thank-you” letter to the customer with an accompanying coupon and post-sale acknowledgement language will also work.

As always, know the rules of the state in which the sale is taking place. Arizona, Connecticut, and Maine arguably prohibit the use of any type of referral sale. Rhode Island, on the other hand, allows a post-closing referral sale, but requires the contractor to provide the customer with specific disclosures, including a chart showing the actual experience of other buyers under the referral fee structure for the prior three years.

This article is for informational purposes only and should not be construed as legal advice.