Continuing our topic of minimum guarantee practices, we’re explaining the approaches used by licensors and licensees as well as how the parties can come to an agreement and secure its execution.
Stakeholder FAQ • Posted on
Considering their complexity, minimum guarantee approaches in brand licensing can seem like a form of art than a scientific subject. Typically, minimum guarantee total and the installments are based on the forecasted sales of licensed products. However, it can be challenging for licensee to estimate the sales through rate during the negotiation phase since it depends on such intangible metrics as, e.g., brand’s awareness within the target market. Nevertheless, there are certain useful practices that licensing stakeholders can exercise in minimum guarantee negotiations.
To estimate the minimum guarantee licensor first needs to analyze the prospective licensee’s estimated sales for the suggested contractual term. Along with that, they should have trust that licensee’s manufacturing and distribution capabilities will suffice for fulfilling the expected results. Some licensing deals may be more complicated than others, making minimum guarantee negotiation challenging for either or both parties. Frequently this happens when licensors fear to assign resources to a seemingly risky deal, placing security measures to assure minimum income and lower their risks. From licensee’s perspective, the simpler the minimum guarantee approach, the better the execution process. If the negotiated minimum guarantee amount seems high for licensee, partners can consider implementing the following practices:
Securing minimum guarantees in itself is a separate topic in partner negotiation, especially from the licensor’s point of view. Ideally, licensee should fully recoup the agreed amount and report overages for a certain period of time. However, licensors should always consider the risks of incomplete guarantee recoupment. From their perspective, it’s important for licensee to recoup the guarantee in all granted territories and categories. The latter point is vital as licensor has reserved the categories or territories to licensee. If they don’t activate sales in them, it translates to missed opportunities as licensor could have pursued another licensee to grant the licensed rights.
There are a few ways to handle this matter, which are:
All things considered, it’s crucial for licensing partners to keep the minimum guarantee matter under control. Poor monitoring of the incoming figures or lack thereof can undermine the progress of a brand’s licensing activity. Most importantly, not paying attention to minimum guarantees might lead to partnership discord and profit losses to all parties. Yet, there isn’t a situation where licensing partners should give up on activating the brand to ensure success in licensing. Licensors have several plan B options if licensee fails to meet the agreed minimum guarantee.
Minimum guarantee approaches aren’t that chaotic of a subject, provided that licensing partners understand the fundamentals. The final decision on a minimum guarantee amount should naturally reflect the common goals of partners in the licensing journey. Similarly, licensing partners should consider the possibility of implementing security measures to ensure the financial success of their licensing program.
CEO and Founder at Flowhaven