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Art of the Deal

Ask Us About Guarantees

This year at Licensing Expo Las Vegas and earlier in the year in connection with TLL’s Annual Licensing Business Survey, we had a lot of people asking about the $1 million guarantee—by most measures, an astronomical and abnormal amount to be demanded in consumer products licensing agreements.

Even some major licensees that are paying out multi-million dollar royalties eschew this kind of agreement, instead agreeing to a variety of alternatives such as a stepped or graduated royalty payout schedule (with royalty rates increasing as certain benchmarks, like retail sales or unit sales, are met) or to spread out the guarantee among multiple brands (if one licensed line does not perform well, payments can be made from another, more successful, line).

Nevertheless, instances of a licensor demanding a $1 million guarantee or higher are on the rise, in part thanks to powerhouses like Disney and the NFL. Several licensees and other insiders we met with on the Expo floor reported annual increases to a 21–23% royalty rate for certain A-list brands, with a handful of manufacturers bemoaning a 25% royalty on wholesale sales. In some cases, top licensors are demanding as minimum payment a sum close to what the manufacturer delivered in total royalties the year before—one amount we heard cited was just north of $20 million.

But this is nowhere near the norm. To get a sense of scale, TLL estimates that 80% of licensing companies worldwide generate under $10 million in licensed retail sales annually. One agent we spoke to representing a brand generating approximately $100 million in retail sales said that just under 80% of licensees earned out their guarantees last year. This is somewhat on the high end, although figures vary widely depending on a brand’s licensee makeup and product diversity—newer manufacturers and expansions will see greater risk. On average, an ambitious (i.e., slightly overvalued) program spanning toys/games, publishing, apparel and accessories, food/beverages, and soft home goods might see a 50–70% rate in a good year.

For those licensees that don’t generate enough sales to earn their minimum guarantee (and start making royalty payments), there are several options available for manufacturers and the industry norms are incredibly varied depending on the brand and product category: either the difference is negligible (and paid out, carried over into the next year, or forgiven entirely) or the licensor agrees to carry over or forgive deficient payments in return for a higher royalty rate, more SKUs, or greater marketing contributions in the next term. Alternatively, the licensor may demand full payment and, in its absence, terminate the licensing agreement.

A more experienced licensor and/or agent might aim to have all or most of their licensees earn out their guarantees in order to keep good working relationships with manufacturers and maintain a steady flow of products into stores. In this case, risk is dispersed more evenly among partners and licensors are more invested in the success of a program than not.

A high guarantee is generally better for a licensor and agent because these companies can plan out expected earnings in advance and shift risk to manufacturers and, in some cases, to retailers as well. Licensees may also appreciate the convenience of paying a flat fee, rather than calculating sales and generating a detailed report each quarter (although they will have to do so, eventually, when they are audited). If there is a bad year, however, it may become difficult to collect royalties from a struggling licensee. In addition, the costs associated with a potential legal action and a subsequent loss of goodwill may outweigh any potential gains.

Experienced licensing executives will do their best to strike a comfortable balance in between these two extremes and ask serious hard-hitting questions about the value of their own brand as well as their licensees’ track records.

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