To continue, coming back now to determining the amount of the Minimum Guarantee. How much of the projection the licensor seeks to secure as a minimum guarantee varies widely by region, category, length of relationship between licensor & licensee and even licensee’s past payment history.
In markets where accuracy in royalty reporting is suspect, the licensor will generally try to secure as much of the projections as possible, even 100%, in the MG, because frankly the licensor may not be confident that, whatever are the actual sales of the licensed products, the licensor may not see any overages, due to inaccurate (intentional or not) reporting. In regions where royalty reporting is highly reliable and accounting practices sophisticated and transparent, licensors may be happy to take only 50-60% of the projection as MG. In fact, for mature and stable licensing businesses, it is more healthy to have a good mixture of MG and overage payments (rather than being 100% reliant on MG payments) – so licensors will be happy to balance out their receivables in this way.
In some parts of the world – namely Asia – where accounting and reporting practices are still ‘creative’ and much of retail is on consignment, there is a tendency in the negotiation for the licensee to want to skip forward to the MG discussion itself, and to have the licensor give them a price – i.e., the MG for these rights will be “X”, rather than to have the conversation from the other direction, i.e., if you (licensee) had these rights, how much do you think you could make for me (licensor), and from there we’ll decide what should be the MG.
Licensors should strongly resist this effort by the licensees to ‘flip’ the table and should stick to insisting that the licensee give them visibility on their sales capacities and expectations, before moving on to discuss MG.
That will be it for 2014, but after the holidays I will pick up with other fun topics such as:
PROMOTION LICENSING ROYALTIES AND FEES
DIFFERENCE BETWEEN PROMOTIONAL LICENSING AND BRANDED FOOD/PERSONAL CARE PRODUCT DEALS
A safe and happy holiday season to everyone!