Minimum Guarantee, Explained
Minimum guarantee, an essential constituent in licensing agreements, is a difficult matter for licensing partners to negotiate. This happens because the parties don't understand how to approach minimum guarantees in different situations. Therefore, it's essential to first understand the concept of the minimum guarantee and what role it plays for all stakeholders.
The Idea Behind Minimum Guarantees
The purpose of Minimum Guarantee differs depending on the perspective. Licensors aim to guarantee a certain return for granting the right to their property. Licensees, in turn, are expected to meet the minimum guarantees. Typically, they are recoupable against the sales of the licensed products.
Amount preferences for minimum guarantees is another subject the parties negotiate on the early stage of collaboration. For licensors, minimum guarantee acts as a retainer that secures that licensee will do their best to push sales. For licensees, on the other hand, minimum guarantees are often difficult to comply with. If they fail to meet the minimum guarantee in a given period, they remain liable to compensate it anyway, regardless of their financial state of affairs.
As a rule, minimum guarantee amounts typically fall in the range of minimum 50% of expected total royalty sum over the contract term. In case there is a deviation, this percentage is more likely to go north of the average than south.
Minimum Guarantee: Two Sides Of The Coin
Although Minimum Guarantee is oftentimes a subject of licensees’ profound struggle, there are positive sides in it for them, too. The main threat of minimum provisions for licensees is the uncertainty of whether they will be able to meet the sales quota required to cover these provisions. If the fear of a licensee manifests itself, they may have to increase margins for the licensed production only to make their ends meet. This, consequently, will lag sales and lead to lower guarantee revenues for licensors.
However, as mentioned before, minimum guarantees are recoupable against the accumulated royalties over a given period. Ability to ensure transparency of financial expectation plays a huge role for licensee’s long-term. In other words, if licensee knows how to ‘read’ minimum guarantees from financial forecasts, they also understand how to succeed in licensing partnerships.
Other Guarantee-Related Practices
In addition to the secure minimum that licensee has to recoup upon generating sales, there is also a termination guarantee. Frequently met in the licensing agreements, this pledge does not imply any liability per se. Nevertheless, it guarantees licensors certain return amount in case of possible infringements or nonpayment. The rationale for termination guarantee is the licensors’ desire to justify the invested time and effort, as well as dedication to the partnership with a licensee.
Licensors can also split the minimum guarantee amount into specific intellectual properties, product categories, or territories. Such practice enforces licensees to actively sell licensed products in each specified categories and countries to achieve the recoupment of each respective guarantee.
Why Minimum Matters
What is important for licensors to understand is with higher risks that accrue to licensees, their risks rise, too. From their perspective, these risks may manifest themselves in malicious, or opportunistic, behavior by licensees. For this reason, licensors should introduce audit programs to their licensing businesses to ensure quality control and reporting. Similarly, to reduce the likelihood of unsuccessful licensing performance, licensors should also take care of securing the relevance of the IP through their marketing efforts.
Although minimum guarantees aren’t always easy to decide, it’s much easier to find a consensus that many assume. For that to happen, the licensor and the licensee need to understand both their individual goals, forecasts, and the joint mission, as well as relevance of the licensed IP to the product category. There also are numerous tactics that help the partners in negotiating best terms of the deal. Again, the licensing partners share risks in a way that intertwines their responsibilities. Thus, it’s vital to consider and strive for a win-win scenario for both sides.