Before I proceed with a new topic I realise I have been remiss in leaving out an important sub-topic to the discussion of Minimum Guarantees and Payment Schedules.
The concept of Cross-Collateralisation and Non-Cross-Collateralisation comes into play in the discussion of how Minimum Guarantees can be earned out in a License Agreement.
Nowadays, Licensors are starting to switch over to the concept of a Common Marketing Fund (CMF), often collected, held and spent (with licensor’s approval) by the agent. The principal of a CMF is, as it suggests a fund commonly held to market the property(ies) into which all or most licensees contribute.
To carry on, nevertheless, the licensees will always be pushing for more marketing support, specifically, spent locally (at retail or against stunts and other marketing activities) an the facts on the ground (as established by some of the big licensors) is they ARE willing to spend at least limited resources in market to provide additional advantage/exposure to their brands and licensed product.
Happy New Year everyone!
I left things off last year with a post about MGs and Payment Schedules.
Now let’s turn our attention to the marketing side of things after the license agreement has been signed and the licensee is getting ready to start to put the licensed product into the market.
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.
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.
This week I am going to cover Minimum Guarantees and Payment Schedules.
Normally, in the negotiation process, the licensor will ask the prospective licensee to give projections as to how much sales the licensee expects to do during the term, using the licensor’s IP. Taking these sales projections and multiplying by the proposed royalty rate, the licensor can calculate approximately how much royalty revenue the licensee is proposing to make for the licensor during the term, if said licensor were to grant the candidate the rights to use the IP.
Carrying on with royalty rates, in terms of other ways in which the royalty rate will vary, premium entertainment brands may try to extract up to 15% of wholesale, and less strong entertainment/character brands may be willing to go down to 8%.
At the core of the licensing agreement are the payment mechanism and terms. Remember, the basic premise is that the licensor ‘rents’ its Intellectual Property (I.P.) to the licensee in exchange for a share of the sales.
The royalty rate can vary by market, by product category, by type of I.P., by the basis at which the royalty is taken, and by lots of other variables – but an approximate starting point is 10% of Net Wholesale.