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Licensing Execs Report More Minimum Guarantee Commitments

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Over 80% of licensing executives indicated that they are required to, or require their licensees to, make minimum guaranteed payments in 2018, according to TLL’s Annual Licensing Business Survey.

The minimum guaranteed royalty, or guarantee, is the minimum amount the licensee agrees to pay the licensor at the end of each year or contract period—regardless of sales. It limits the licensor’s risk and encourages the licensee to do whatever it can to succeed with the licensed line.

Guarantee amounts differ depending on the deal, but they usually equal a percentage of expected royalties over the guarantee period (typically, 25%). Guarantee amounts are subject to negotiation and vary depending on each party’s objectives. Guarantees range from nominal amounts (say, $350) to as high as $20 million (for a long-term video game, toy, or publishing deal), or higher. Sometimes, higher guarantees are associated with a “pool” strategy in which an agreement covers multiple properties—if one line doesn’t do well, the licensee can make up for those losses with another line—rather than seperately negotiating individual guarantees for each property.

Some agreements do not require a guarantee at all, especially for low-margin merchandise like food and beverages or goods sold in low-margin, discount channels.

Thanks in part to poor licensed sales performance in 2018, licensing executives reported that licensors were more likely to “forgive” minimum payments, allow the licensee to renegotiate for lower rates (as low as 20% of expected royalties), or space out payments over time rather than demand a single lump sum.

While the share of licensing execs who reported that they were expected to make minimum payments was up from previous years, the actual dollar amount demanded for guarantees did not substantially change year-over-year in 2018.

Half of respondants indicated that their guarantees stayed the same compared to 2017, while an equal share said that their guarantees increased (25%) and decreased (25%).

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