The concept of minimum guarantee approaches in brand licensing often resembles some complex form of art. Typically, a minimum guarantee total and installments are based on the forecasted sales of licensed products. However, often licensees find it challenging 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. Yet, licensing stakeholders can resort to certain useful practices during the negotiation of minimum guarantee amounts.
Here a few most important of them.
Negotiation of Goals And Targets
To estimate the minimum guarantee licensor needs to analyze the licensee’s estimated sales, validating that their manufacturing and distribution capabilities are sufficient to achieve the expected results. If the licensor fears assigning resources to a seemingly risky deal, they will undertake security measures to assure minimum income and lower the risks. From the licensee’s perspective, the more straightforward the minimum guarantee approach, the better the execution process. If the negotiated minimum guarantee amount seems high, the following practices might help:
- Lowering the advance payment. Advanced payment ensures the security of licensed products' sales. Such payment varies between 25% and 50% of the guaranteed total and acts as a proof of the licensee’s commitment.
- Splitting minimum guarantee into instalments. The total sum of the minimum guarantee can be paid over the term, which does not 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.
- Assessing the likelihood of the licensee's opportunistic behavior. Sometimes, a licensee can be overly optimistic in their initial sales forecast. That is, they define minimum guarantee based on unrealistic sums, eventually failing to meet them. To avoid this, both parties must share the responsibility of setting a reasonable minimum guarantee amount.
- Reducing territories/categories tied to the forecast and the business plan. To avoid significant mistakes, the licensee must make sure she they aren't biting more than they can chew. If they take on too many territories and categories at once, they might struggle to fulfil the agreed obligations. Instead, it's better to carve out specific categories or territories that are ‘riskier’ than others, lowering the forecast and the minimum guarantee. Licensor can reserve these categories/territories for an agreed period until licensee gains market validation.
Securing minimum guarantees is a vital 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. Nonetheless, licensors should consider the risks of incomplete guarantee recoupment. From their perspective, the licensee must recoup the guarantee in all granted territories and categories. This is particularly important if the licensor reserves specific categories or territories to licensee. So in case of "inactive" sales, the failure to correctly recoup the minimum guarantee translates to missed opportunities, especially for the licensor.
The following are a few ways to handle this issue:
- Establish separate minimum guarantee for each country or territory that a licensee is responsible for. For licensor, this alleviates the risk of licensee’s loss of motivation to drive sales in all agreed territories. Such practice is especially relevant if one or few of them are outselling the rest.
- 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 is not high enough to fully recoup the minimum guarantee, licensor may also suggest lowering the minimum guarantee during the active term with an amendment for the negative scenario of licensee not meeting the sales, or move a portion of the minimum guarantee to another (new) agreement with a different IP or other rights.
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 for all parties. Yet, there isn’t a situation where licensing partners should give up on activating the brand to ensure success in licensing. Licensor has several plan B options in case their licensee fails to meet the agreed minimum guarantee.
Minimum guarantee approaches aren't that difficult to figure out, provided that licensing partners understand their fundamentals. The final decision on the minimum guarantee amount should reflect the common goals of partners in the licensing journey. Similarly, both partners must consider the possibility of implementing security measures to ensure the financial success of their licensing program.