Most arrangements between small businesses are informal and work fine until a customer complains or a payment is late. Settling four questions in advance, in writing, prevents nearly all of it.

The arrangements this covers

Not a legal partnership. The everyday versions.

Each has a different answer to the questions below, which is why the first task is being clear about which one you are in. A surprising number of arrangements are ambiguous even to the participants.

The four questions

Whose customer is it

Who holds the relationship, who may contact them afterwards, and who may market to them later.

This is the question that ends arrangements badly. A subcontractor who leaves a card and gets called directly next time has taken something the other party believed was theirs.

Settling it in advance is straightforward. Discovering the disagreement afterwards is not.

Who is responsible if something goes wrong

Who the customer complains to, who fixes it, and who bears the cost.

Under a subcontract the main contractor is generally answerable to the customer regardless of who did the work, which is worth understanding before agreeing terms.

Who gets paid, when, and by whom

Whether the subcontractor is paid on completion or when the customer pays, which are very different risks.

Paid-when-paid arrangements transfer the customer's payment risk to the subcontractor, and should at least be explicit rather than discovered.

Who is insured for what

Whether the subcontractor carries their own liability cover, whether workers are covered under the applicable provincial scheme, and whether either party's policy would respond.

Requesting evidence of coverage before work starts is normal practice and is frequently skipped between businesses that know each other.

Referral arrangements specifically

The most common and the least documented.

What to settle: whether anything is paid, how much and when, whether it applies to repeat work from the same customer, and whether the arrangement is exclusive.

Two cautions. Referral fees in some regulated professions are restricted or must be disclosed, so anybody in a regulated field should check their own rules before agreeing anything.

And an arrangement where a customer is referred without knowing a payment was involved is a disclosure question worth thinking about, since customers assume a recommendation is based on merit.

Many trades refer without any payment at all, on reciprocity, and that arrangement has the advantage of being simple and durable.

What to write down

Less than a contract and more than nothing.

A page covering the four questions, the scope of what each party does, the rate or the split, the payment timing, and how either party ends the arrangement.

For a one-off job, a message confirming what was agreed is sufficient and considerably better than a conversation. For an ongoing arrangement, a document is worth the hour.

The value is not enforceability so much as having something to point at. Most disagreements between small businesses are honest differences in recollection, and a written version ends them quickly.

The reputation exposure

Worth being explicit about, because it is the underestimated risk.

When you bring another business onto a job, their work becomes your reputation. A customer does not distinguish between the contractor and whoever they sent, and the review names you.

Which is why the standard for who you work with should be higher than the standard for who you hire, since you have less control and more exposure.

The reverse also applies. Being subcontracted by somebody who treats customers badly attaches you to that, and it is worth declining work on those grounds.

The signals that an arrangement will not work

Ending it

Worth agreeing at the start, when nobody is annoyed.

How much notice, what happens to work in progress, and what happens to shared customers afterwards.

Arrangements between small businesses end regularly and mostly for ordinary reasons, and one that ends cleanly leaves both parties able to refer to each other later, which is worth considerably more than winning the argument, and it depends on the same clarity that prevents disputes with clients, as covered in writing a scope that prevents arguments.

Frequently asked questions

What arrangements does this cover?

Subcontracting in either direction, referrals, joint jobs where each party bills separately, and white labelling. Being clear which one you are in is the first task.

Which question ends arrangements badly?

Whose customer it is. A subcontractor who leaves a card and gets called directly has taken something the other party believed was theirs.

What should be settled about payment?

Whether the subcontractor is paid on completion or when the customer pays. Paid-when-paid transfers the customer's payment risk and should be explicit rather than discovered.

What about referral fees?

Settle the amount, timing, whether it applies to repeat work, and exclusivity. Some regulated professions restrict or require disclosure of referral fees, so check your own rules.

What is the underestimated risk?

Reputation. A customer does not distinguish between you and whoever you sent, and the review names you, which means the standard for partners should be higher than for staff.

What signals a bad arrangement?

Reluctance to put anything in writing, vagueness about payment timing, no evidence of insurance when asked, criticising previous partners, and wanting exclusivity without offering volume.

West Coast Media Solutions Inc. provides web design, web development, hosting, digital marketing, and business consulting to organisations across Canada, drawing on more than twenty-five years in the field.

Working alongside another trade on a handshake?

We put the four questions on one page, which is usually the difference between an arrangement that ends cleanly and one that ends in a dispute.

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