Minimum royalty guarantees are a core tenet of licensing. An industry standard, guarantees ensure that licensees have an incentive to support and promote the licensed property, provide licensors with a defined and (somewhat) reliable revenue stream and, through advance payments, cover early costs before royalties are generated.

There’s no denying that guarantees are important, but in the right situation, is it worthwhile to forgo them? My belief is that in certain instances, it is not only okay to waive minimums but advisable.

The greatest benefit of minimum guarantees is not monetary. Rather, it’s about skin in the game. Minimums help ensure that licensees will do their part to support a brand. They are an incentive against “category squatting.” Without a guarantee, a licensee can sit on a property and do very little with it. Maybe they will proudly become a leading brand advocate, your standard bearer, diligently pursuing every retail and customer lead. Or maybe they will add your brand to their collection of 100 others finding a nice place for it in the back of their catalog.

All that said, I’m still willing to roll the dice. If I feel that I’ve found the right partner for strategic reasons (e.g., a critical product category), then it makes sense to move forward even without guarantees. I believe in working from a long-term perspective.  If I’m right about the licensee, royalties will flow in the not-too-distant future.

In these instances, however, it is best to find other ways to ensure a licensee will stand behind the partnership. These commitments can include a mix of:

• A minimum manufacturing and R&D investment
• A minimum annual SKU count
• A committed marketing budget
• An agreement that licensed product will be included at relevant trade shows and in pertinent catalogs

Licensees are more likely to agree to the above because they are all actions they would take to launch a successful product in any situation, licensed or otherwise.

I’d also recommend a contractual provision that would compensate the brand owner at a pre-determined amount if the licensee fails to make a reasonable effort to launch the program. The definition of reasonable effort will surely be a point of conversation during negotiations, but it should provide a brand owner with some reassurances to safeguard their investment.

Finally, don’t forget that this is considered a trade off. If you are waving guarantees, try to get something in return. I always go for a higher royalty rate.

Which side of the fence are you on? Am I too generous in my approach? Should a licensee always be required to provide security in the form of guarantees? If not, do you have other contractual stipulations you would suggest including?

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