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Licensing 101: Minimum Guarantees and Payment Schedules Part 2

26 December 2014

OK, if you’ll remember, last time I talked about the two parties having agreed to a minimum guarantee and the various other terms and have entered into a license agreement. What happens then is with the payment upon execution, the licensee has a ‘credit’ with the licensor in the form of the MG amount paid to date, and when the licensee begins selling licensed product and reporting its sales in terms of royalties due to the licensor, those royalties earned are deducted from the MG balance on hand with the licensor.

 

If over the course of the agreement the reported royalties exceeds the amount of MG paid to date, then the amount of earned royalties in excess of what’s been paid are immediately due upon reporting.

Example:

Let’s say a licensee has a $20K MG, and the payments are for Jan 1, 2015 $10,000 (upon execution) and the balance $10,000 is due Jan 1, 2016. The licensee pays the first installment of $10,000 Jan 1, 2015, and starts producing and selling product by April 2015. By November 2015, let’s say the Licensee has a total cumulative reported earned royalties of $12,000. Then, the licensor will send an invoice for the $2,000 which is in excess of the MG installment (upon execution) paid to date. Then, come January 1, 2016, provided no additional royalties have been reported and paid, the licensor will bill the licensee for a balance installment of $8,000.

Once the full MG has been paid, and the full MG exceeded in terms of sales, then the licensor will bill the licensee upon receipt of quarterly royalty statement, until the end of the agreement.

So, you can see that it is a Minimum Guarantee in the sense that it is the least the licensee will pay. If the earned royalties from the licensee’s sales exceed the value of the MG, then the licensee will pay overages as the royalties are earned and reported.

On the other hand, and consistent with the concept of a Minimum Guarantee, if the licensee fails to earn royalties equal to or in excess of the Minimum Guarantee, it will NOT receive a refund.

Not done on this topic yet; more later.