Minimum Guarantee, Explained
Minimum guarantees, and especially negotiation them, often seem like a sophisticated form of art than a financial subject. Typically, minimum guarantee and installment amounts are based on the forecasted sales of licensed products. However, it can be challenging to estimate the sell-through rate during the negotiation phase, since this rate can largely depends on intangible metrics like the awareness of a brand in its target market. Nevertheless, there are some useful practices that licensing stakeholders can exercise to understand how to calculate minimum guarantees for their licensing programs.
To estimate the right minimum guarantee amount for a licensing agreement, licensors first need to analyze the prospective licensee’s sales estimation for the specified contractual term. Important, they should have solid trust that licensee’s manufacturing and distribution capabilities will suffice to ensure the expected results.
Negotiating Minimum Guarantee Goals And Targets
Some licensing deals may be more complicated than others, making minimum guarantee negotiation challenging for the involved parties. This is often the case if the licensor fears to allocate resources to a seemingly risky deal. Such fear leads them to undertake security measures to ensure a minimum income and lower personal risks. From licensee’s perspective, in contrast, the simpler minimum guarantee, the better it is for the process execution.
If the negotiated minimum guarantee amount seems high for the licensee, partners should consider implementing the following:
Lowering the advance payment. Introducing advance payment in a licensing deal help parties to achieve a certain extent of security regarding licensing revenues. Advance payments vary between 25% and 50% of the guaranteed total and serve as proof of the licensee’s commitment.
Splitting the minimum guarantee into installments. The total sum of the minimum guarantee can be paid over the term, which doesn’t change the total, but lowers the risk for the licensee to start the project as the advance investment isn’t too high and they can recoup the minimum guarantee during the active sales.
Revisiting forecasted sales amount and re-evaluating the likelihood of licensee’s reaching it under the contract terms. In some cases, a licensee can be overly optimistic in their initial sales forecast, defining the minimum guarantee based on the sum can turn out to be far from reality. Therefore, parties are responsible for establishing the minimum guarantee that is realistic and reasonable while bearing its recoupment in mind.
Reducing territories or product categories used in forecasts. To set the partnership off to success, the licensee should clearly understand and communicate their sales capacity. If they take on too many responsibilities at once, they may eventually struggle, and even fail to keep up sales in all licensed categories or granted territories. One resolution could be to carve out some categories or territories that are ‘riskier’ than others, lowering the forecast and the minimum guarantee. In this case, the licensor can reserve these categories/territories for an agreed period until licensee gains market validation.
Securing minimum guarantees is another tricky clause in the deal negotiation process, especially for the licensor. Ideally, the licensee should fully recoup the minimum guarantee and report overages for a certain period of time. However, licensors should are ( and should be) always cognizant of the risks of incomplete minimum guarantee recoupment.
From their point of view, the licensee to recoup the minimum guarantee in all granted territories and categories. This is indeed critical, as the licensor reserves the categories or territories to the licensee. If they don’t activate sales in these categories and territories, for the licensor that will mean a missed opportunity.
There are a few ways to handle this matter, which are:
Establish separate minimum guarantee for each country or territory the licensee is responsible for. For brand owners, this will alleviate the risk of licensee losing their motivation to drive sales in all agreed territories. This is especially relevant if one or few of those territories are outselling the others.
Reserve the right to exclude certain territories or categories from the agreement if they remain inactive for a long period of time
If the sales rate isn’t high enough to fully recoup the minimum guarantee, licensor may also suggest lowering the minimum guarantee during the active term, or move a portion of the minimum guarantee to another (new) agreement with a different IP or other rights.
All things considered, brand owners should keep the minimum guarantee matters under control at all times. Poor monitoring of royalty and recoupment figures, or lack thereof, can undermine the progress of a brand’s progress in licensing. Not paying attention to the financials might also lead to partnership discord and profit losses for all parties.
After all, negotiating minimum guarantee isn’t as complicated as it seems, provided that both licensing partners understand its fundamentals. The final decision on a minimum guarantee amount should naturally reflect the common goals of partners in their licensing journey. Similarly, partners should consider the possibility of implementing security measures to ensure the financial success of their licensing program.