Sizable Guarantees or No Guarantees? Long Term Success May Depend on the Answer

I recently read The Licensing Letter’s Annual Business Survey results article in their March Issue.  The headline was “Royalties Steady, But Licensors and Licensees seek Greater Flexibility in Total Licensing Payment Packages”.  The gist of the study was that the continued increased willingness to negotiate the terms of licensing deals was affecting guarantees and advances much more than royalty rates.   Nothing has put more pressure on the size of guarantees/advances as the poor economy of the last 5 years.    Licensees have continually pummeled Licensors with the point that in this economy they bare such increased business risk in just investing in a new licensed product line, why should they increase their risk further by having to pay an advance and/or minimum guarantees if they are not successful.  I even had one Licensee client of mine who was arguing hard over minimum guarantees and sales volume projections say to one Agent, “here is how much guarantee I am willing to pay, you make up the product sales projections you need to share with your Licensor client  ‘cause I really don’t care what that number is.”  A quote from an agent in the Licensing Letter article also stated, “Long gone are the days of licensees’ willingness to provide significant advances and guarantees.”

I decided after reading this article and given my own recent experiences that this would make a good subject for my first blog post of 2013.  The tension that exists on the topic of royalty guarantees and advances is very acute right now. However, it is a battle that goes to the heart of long term success of the consummated deal.   Guarantees exist for extremely good reason; they were originally developed to protect the Licensor from “burying” the license grant with a Licensee who is not really committed to the long term success of the license.   Guarantees must be sizable enough as to create a vested interest on the part of the Licensee to make the license deal successful over the long term.    So to give too far on guarantees threatens the long run success of the Licensing deal and long term royalty flows are really the Holy Grail of brand licensing.   It is where the most wealth is created for all parties concerned.   Guarantees are historically calculated as a % of the Licensee’s annual sales projections over the life of the licensing deal.   What that % needs to be is where the art of negotiating comes in and why you hire firms like Brandar Consulting to assist you. 

Certainly there can be a degree of flexibility and creativity as to how the guarantees are negotiated. Cross-collateralizing the guarantees across years is just one of my favorite ways to provide your licensee with needed flexibility.  Giving up on collecting an advance on royalties is another such tool.  To me the advance is a tool that was developed by the Licensing Agent community as a way to get an agent some commission $ to live off while waiting for the first royalty streams to materialize, which can be 18 months down the road.  While the agent may need the advance commission, the Licensor usually can easily afford to live without it.  The advance also immediately siphons off investment dollars that the licensee should be investing on launching your branded business.   Guarantees are a completely different matter; they are calculated and collected when the Licensee’s Sales projections say they should be.   For this very reason, relieving a licensee of the obligation to pay sizable guarantees is a mistake that I believe will not lead to licensing deals that perform in the long term.  The guarantee is the skin in the game for the Licensee over and above their business risk; which at times can only be a fraction of the guarantee.  Royalty guarantees can create an extra sense of commitment from your Licensee that may well mean the difference between success and failure.  

When I ran AT&T’s licensing program, we had an extremely large guarantee that we negotiated with our largest licensee on a 10-year deal.   Well the Licensee ran into business difficulties early on and if we did not have that sizable guarantee in place, they most certainly would have walked away from our agreement poisoning our most valuable licensing category likely in perpetuity.  Because the Licensee did not want to be on the hook for those sizable guarantees, they remained committed to making the licensed business a success.  Now we ultimately did lower the guarantees because they were clearly based on faulty Sales projections, but we still maintained the guarantees at a sizable enough level so as to maintain this Licensee’s commitment to our branded product line over their own.   This AT&T licensing relationship still exists today some 13 years later and it stands as a testament to the importance of substantive royalty guarantees in forging long term success in licensing contracts.

Mike Slusar

Managing Director & Owner
Brandar Consulting, LLC
“Helping Brands Reach for The Stars”

email: mike@brandar.com

http://www.brandar.com/

copyright © 2013 Brandar Consulting, LLC  All Rights Reserved