At Flowhaven, many of the customers we talk to are interested in fine tuning their brand licensing business operations because they have not received the full return on their investments. This is an industry-wide issue that sees scores of brand owners lose out on profit due to financial mismanagement or oversight.
One central problem is the minimum guarantee. An elusive and sometimes fear-inducing term, the initial sum paid to the brand owner by the licensee irrespective of how the product performs, can present a false sense of security to all parties. In some cases, once the brand owner has received the minimum guarantee, they stop accounting for additional royalties, missing out on gains that can often be more than the minimum guarantee.
Below, we offer tips to help you understand the function of the minimum guarantee and establishing systems to help you recoup all of your profits.
Creating a System
A clear, concise financial spread is the most effective way to keep track of a licensing program’s profits. Both the licensee and brand owner should write out all of the costs of the program including the initial investments, fees, minimum guarantees, royalty rates and more. Both companies should designate people to manage when and how much has been recouped on an ongoing basis.
Once the minimum guarantee has been met, the licensees can subtract that amount from total monies owed. The difference between the minimum guarantee and the net earnings will determine if the program was successful.
Partners should work together to determine how often payments should be made. The schedule will depend on the accounting team’s payment schedules as well as other factors such as the time it will take to get the product to market and how long the product will be available on store shelves.
Licensing partners should conduct regular check-ins. Periodic check-ins can be used to discuss production bottlenecks or event impacting the marketplace ( i.e., a character controversy, pop star’s new album, major sports event). Understanding the market conditions will help to forecast your earnings and develop a realistic minimum guarantee. Beleive it or not, some brand owners stop communicating after they have received their minimum guarantee and lose out on critical earnings.
Going through the process of tracking and recouping profits is not only financially beneficial, it also provides key insight into a licensing partner’s strengths. If a licensee is unable to meet the minimum guarantee and can only sell a few units of product, perhaps the pairing was misguided. On the opposite side, a partner who reaches the minimum quickly and whose products enhance the original brand may be worth working with on future deals.
Depending on the nature of the deal, brand owners may rope marketing costs into their licensing agreements, expecting promotional monies to be paid back alongside minimums and royalties. If marketing costs are meant to be recouped, there should be specific provisions in place that specify if all, some or none of the investments should be paid back; how long campaigns will run and; if specific markers of success need to be met.
It is easy to lose track of payments if effective bookkeeping systems are not in place. Many times, established companies will call on a bank or another third party financial institution to reserve the minimum guarantee on their behalf. This is a helpful step to ensure that all parties are paid on time and in the right amount.
The beauty of brand licensing is that brand owners and licensees, each with their own specialties, can come together to create products that delight fans and help them profit. However, those relationships can turn sour or result in losses if they aren't appropriately managed. Use the tips above recoup maximum returns.