The Most Important Deal Terms in a Brand Licensing Agreement
In this video, I address the important deal terms in a brand licensing agreement and what the normal ranges are for those terms. This video illustrates Step 6 of my 8-Step Brand Licensing Process [Getting Ready For The Draft – Segment 2]. You can view more of my videos on brand licensing on my YouTube channel or on my videos page.
Hi, I’m Pete Canalichio, and welcome to the brand licensing pre-launch. You’ll recall in our fourth video, Hugh and I talked about getting ready for the draft. And when we talk about that, what we’re saying is, we’re looking at those prospective licensees out in the marketplace and which ones of those we want to actually bring on our team and how they are going to size up. So in our first video, as we talked about getting ready for the draft, we talked about how they complete the conservative business estimator, or the forecast. In the second part, I’m going to talk a little bit about the deal terms that are common and what those definitions of those deal terms are. So let’s first start off with an easy one: the term. And the term really is as simple as it means. It’s “when does the contract start?” and “when does the contract end?”. And that’s very important to know from a whole series of legalities, but it’s also important from an aspect of “can that manufacturer be successful in the marketplace during that period?”. The next thing we’ll look at is exclusivity. And what we mean by exclusivity is “does that particular manufacturer have the rights?”. And the only one that has the rights is the manufacturer product in that category with your brand on it. Normally this is not granted, and it’s not granted for a number of reasons. But the most important reason why brand owners do not grant exclusivity is because if that particular manufacturer doesn’t do the job that you want them to but they’re still meeting their other requirements and obligations of the contract, you may not be getting any product to the market in that category, which could be very important to you. So by granting exclusivity, you may be cutting yourself off from actually getting someone else to produce the product yourselves. The third one we’ll look at in the common deal terms is the royalty rate. The royalty rate is probably the most important deal term to both the licensee and to the licensor because that royalty rate says a number of things. It says first off to the licensee what percentage of their net sales is going to be sent to you, the brand owner, as a royalty payment each quarter. The second thing that says to the brand owner is how their brand stacks up against all the other brands. Because if the royalty rate is higher, then that brand means it’s more desirable in the marketplace. So royalty rate is a very important component from both a brand for positioning and also from a royalty calculation. The next particular deal term that we’ll talk about is an advance. An advance is a cash payment made when the contract is signed, and typically that advance is 50% of the minimum guaranteed royalty requirement for that first year. We’ll get into minimum guarantees in a second, but the cash advance is important because that’s money put down up front by the manufacturer. So they’re off the hook because they know now that they have to sell product in the marketplace to offset that cash advance and start getting from being red to into the black. And when we talk about minimum guarantees, what we’re saying is if they’re forecasting a particular amount of sales in the marketplace at a particular royalty rate, then the minimum guarantees are a percentage of that forecast. And normally the minimum guarantees are somewhere between 25-40% of the forecasted sales, so very achievable but still substantial. And these minimum guarantees really put teeth in the agreement because they’re required to be paid every quarter, and they are having to be paid whether or not the manufacturer actually sells product in the marketplace. And that’s why it’s important for them to get approved products sold into the retailers and sold through the consumers. Finally, we’ll talk about new product introductions. This is the lifeblood of any real program because consumers are expecting those new product introductions, they’re expecting innovation, and the brand owner wants to make sure that the manufacturer is paying attention to this. So this is a requirement put in the contract so that the manufacturer has to create new products each and every year to stimulate the consumer base and keep the brand positioned where it needs to be and the program successful.