March 14, 2019
Building Blocks Of Licensing Agreements
By Lewis Stark
Key Financial Building Blocks Of Licensing Agreements To Maximize Revenue And Protect Intellectual Properties
Partner, Royalty Audit & Contract Compliance Group
In the retail marketplace, the cachet of licensed brand merchandise has consistently buoyed consumer sales. In fact, a survey by the International Licensing Industry Merchandisers’ Association (LIMA) showed that global sales of licensed goods rose 4.4 per- cent from 2015 to 2016, significantly higher than the 2.9 percent growth rate for overall global retail sales.1
However, a more pertinent issue to brand owners and licensors is royalty revenue, which showed a year- over-year increase of just 1.3 percent. In its survey, LIMA noted that actual year-over-over royalty rates declined slightly (from 8.5 to 8.2 percent),2 largely be- cause the continued growth of online shopping among consumers is forcing retailers to be more aggressive about preserving gross margins. More specifically, it is wise to understand that when royalty revenue rises at a time when average royalty rates are falling, that trend almost always indicates strong demand for licensed brand merchandise.
Given the reality that margin pressure on retailers will not ease anytime soon, it’s important for both brand licensors and licensees to have greater clarity on the financial—not just legal—provisions of their agreements. Why? Consider the following:
For licensors, a well-designed financial agreement provides strong incentives for the licensee to fully exploit the branded properties, while setting specific terms by which the licensor will receive royalties or profits. This includes clearly defined financial provisions and the removal of ambiguous language from a licensing agreement, which will increase royalty revenue and prevent unnecessary disputes down the road. Well-designed agreements also help enable the licensor to recapture certain rights or terminate the agreement if a licensee misses sales or other targets for the rights granted, while protecting the value and integrity of the licensor’s trademarks, brands and characters. In addition, a solid agreement will include financial provisions that maximize royalty revenue while preventing, limiting or penalizing certain activities that can damage those valuable assets.
