How to Negotiate a Licensing Deal: Part 1 | CLS Program

[00:00:04]hi everybody uh welcome to this session of the cls program the course work in licensing studies i'm marty brockstein um you know we you when you talk about licensing you're talking often about the product the property um you know the product development and then various facets of of the uh creation of a product or service uh being used by a property by a licensed brand um today we're not talking about any of that specifically we're talking about how to do the deal um how do you get to the product and the property coming together um to to form a licensed good or service so how do you negotiate the deal if you're a licensee or a license or what are the things that you need to be watching out for um what what's the language you have to use to talk to the party across the table so we have a couple of experts who have been at this a really long time and know their way around a licensing deal stephen heller and alita friedman to talk today about how to negotiate a licensing deal tools tips and techniques for negotiating them uh so i will turn this over to stephen and alito wow thank you marty uh really our pleasure to be here today with you um my name is stephen heller i'm actually a trademark and licensing attorney with over 30 years experience in licensing i'm also a business law professor where i teach business law trademarks and licensing and in fact right now i teach a negotiating license agreement workshop at nova southeastern law school and i'm also the founder of a leading licensing agency called the brand liaison at the brand liaison we represent both brands and manufacturers as the licensees so we're negotiating these deals very often on either side of the table and you'll see this is going to be a very unbiased uh presentation today where we talk about benefits for both licensors and licensees we work in fashion brands children's apparel sorry children's entertainment sports art and photography licensing but the structure of the licensing deal is the same no matter which category you're in if any of you have seen me speak before some of you know my famous or infamous story of discovering the ninja turtles back in the 1980s when it was still only a comic book and a figurine and i saw the ninja turtles and i said this is never going to well i made up for that mistake a few years later uh the biggest deal i've ever done is the introduction of sesame street licensed products at kmart was over a 100 million dollar program i've done worldwide trademarks and licensing for many major uh fashion brands and entertainment properties including last year securing the rights for the nfl for one of our clients for all of uh china and asia and we work with many uh fashion brands and celebrities it's really a pleasure to be here today especially with my uh co-host uh elita friedman thanks steven i'm elita friedman i am a cpa by trade i spent 15 years with a big firm working on a variety of clients in the manufacturing and entertainment field and i my first licensing show was in 2003 in new york that was my exposure to the licensing industry and i grew a brand from basically an artist drawings into an entertainment brand with a few hundred that 100 million dollars in sales and an animated feature film after growing that brand i started my own consultancy and i work on boutique clients i seem to have a passion for startups so i have been working on a lot of corporate brands that are not startups as well as new brands such as inktober and gaming properties like my singing monsters i have been doing partnerships and my goal for my clients is to grow revenue through branded extensions and through licensing clever marketing extensions i'm also on the board the executive board as the secretary and treasurer for the last five years of women and toys and have previously won a women in toys award i am excited to be here today i also teach an mba class in ventures in brand licensing at lehigh university and steven and i look forward to teaching you or explaining to you with our examples everything that goes into negotiating a licensing and we'll we'll use our real life examples for you um that's great actually if we go to the next slide um that's a perfect lead in a leader to why we're here today um to help you understand how to negotiate a licensing deal and offer you some tools techniques and and tips um in fact we're going to provide you with a reference term sheet you can use this to negotiate any licensing deal but it really will key you into all of the key business terms that you need to focus on as you're negotiating the terms of a licensing deal we're going to present some of our insights we're going to give you solutions to some of the common hurdles and roadblocks that stand in your way and we're going to get into a little bit of detail and explore the payment structures to help maximize the revenues when you're on the license or side or minimize your exposure when you're on the licensee side so without further ado let's jump right in to the form of deal memo in fact there's a picture up on the screen uh of an actual completed deal memo that uh we've used in one of our contracts and uh you can see it filled out here obviously crossed out the names of the parties but this is exactly the way a form looks and this document very often gets signed uh or becomes the elements for either the exhibit or actually putting into the nuts and bolts of the long form agreement so what is what are the key elements of the deal terms let's start off with the parties you want to start us off elite sure so the parties to the transaction are going to be the licensor the person that has the intellectual property that they are going to license out because it is a valuable piece of ip and the licensee the party that wants to take on the license and apply that license to a service or a manufactured product the licensee is going to be the vendor of record and the licensor is going to own sort of that chain of title so it's very important to put the legal names of who is doing the transaction here as an example there's a property i work on called inktober it's created by an artist so the artist because he owns the ip his name is a party to the transaction in this example his name would be jay parker jake parker but his company is called jp creative llc so they are also a party to this transaction so the trademark owner creator and the llc or the party as the licensed store on the licensee side the manufacturer in this case it would be pen and ink companies anything in the art space they would be the latency and you want to use the property entity name for that yeah and that becomes really important elita on the license or side you mentioned the words chain of title it becomes really important that you have the right entity that actually owns the trademark and that's relevant whether you're with an individual like the person you mentioned that may own some ip in their personal name or a big corporation that's a giant conglomerate um with several subdivisions or something you want to make sure when you have a trademark or an ip license agreement that you can go to the trademark office you can go to see who owns the copyrights and make sure you have the right party's name as the licensor so that you have that actual chain uh and the same with the licensee the key is who is the vendor of record who is the one that's actually selling the goods to a major retailer or selling the goods through or to amazon or or e-commerce because the one who's actually selling the goods is the one who's getting the money and that's the party whose name needs to be on the contract and i can't tell you how often we get term sheets or deal memos that refer to a generic name there's no inc or limited or llc and they might be like xyz group because there's three or four different legal entities within the quote-unquote group but there is no legal entity called the xyz group so it's very important because it's a legally binding contract that you have the actual full party's name um whether it's for the licensor or the licensee the next section the licensed property and this is going to be one of the key elements what are you licensing and we can tell you some some great stories um where there have been mistakes here and it seems so so obvious right what we're licensing or what the license or is giving but it actually gets very complicated when you get into the nuances of these licensing deals for example if it's a fashion brand well you have brands like donna caron and then dkny or armani amani exchange and if you look at ralph lauren he's got ralph lauren lauren by ralph lauren ralph lauren chaps purple label what property are you actually licensing um and when it comes to the toys or movies if you licensed star wars for example are you licensing the original star wars all of the sequels prequels diffusion um properties and even more recently look at fortnite so if you were the licensee for fortnite obviously it's the word for tonight but which characters and is it series one or series two and sometimes uh you may not even anticipate what's going to come in the future so you could lock yourself in um to to a very broad license when it's not what you intended because as you come out with series 2 series 3 there may be more money on the table or you may choose to go with different partners so very important that we're identifying exactly what uh the property is um elite you have some examples or style guides or sure um for example and there's a property probably everybody knows an entertainment property called care bears and when you're going to licensed care bears it's been around for such a long time as an evergreen property that you have to designate which license you want to take or what license they want to give you so you might just thinking you're getting all of care bears but in actuality are you licensing the anniversary edition are you actually licensing care bears trend care bears baby or the care bears classic property each one of those is a different property it's a different piece of ib it has a different style guide that goes with it so it's going to be differentiated so you have to make sure when you're taking on the license that you understand which license you're asking for and on the license or side which license you want to give this manufacturer and of course you can give them all it might cost you a lot care bears is a great example but even just look at something like spider-man or superman you have comic books and that drawing you have the movie versions you have the anime versions like you said sometimes there's spider-man junior and and and a kids version um and then you even have offshoots of of some of those you know like smallville for superman or or some of these others so very important from the license or perspective that you identify exactly what you're intending to give and you don't make it too broad and from the licensees perspective you know exactly what you're getting um as far as both the branding the ip and and the assets and elita mentioned the style guide um some of that will come in a style guide and you'll see exactly what imagery is included um if we go to the next product categories again it seems so instinctive one of the products that the licensee makes and what are you licensing but i can't tell you how many times we see errors uh made in fact i'm not going to tell you the name of the company but there's a very strong footwear brand um probably a hundred maybe two hundred million dollar brand a very strong name in footwear and i said hey this is a great brand i met with them in a trade show i said why aren't you guys licensing this out i could think of a lot of different uh licensing opportunities he says well uh we are doing a license we're doing a license for apparel and they use the word apparel in their license agreement i said to him well what kind of apparel because there are lots of categories in apparel you have you know everything from jeans to outerwear to sleepwear underwear maybe denim is a separate category sportswear activewear is very often distinguished from you know everyday printed tees um so i said well what kind of apparel and it turns out it really wasn't even apparel they were doing hats and gloves and scarves which we in the industry called cold weather accessories but this was a footwear company that built a very good brand because they know footwear but they didn't know licensing and their license contract actually said apparel um sometimes you get into very fine distinctions when you do leggings versus hosiery and in leggings you have the package versus hanging versus how does that tie into activewear very important so we're really talking about getting really really specific right into the nitty-gritty of exactly listing out in the deal memo and eventually in the contract exactly what you want to license so if you're a manufacturer of stationery for example it's you're going to assume everything that you manufacture is going to fall into stationary but the licensor is going to look at it differently they want to know are you doing notebooks and pens and markers and pencils stickers come up are stickers stationary it really depends so i've had a situation where we've had to clarify and go back to the actual agreement and make an addendum that stickers can be included in a stationary category same thing with plush when you think about plush you're thinking about that huggable toy that they come in different sizes they also come in versions very expensive specialty plush mass market plush and they also come in versions that you might find in amusement parks right or in machines redemption gifts and that's amusement plush and believe it or not there are different categories of plush and it's very important that in the deal memo you're going to identify what the category and what the product is nitty gritty is such a perfect word that you just used because it gets to the point of sometimes identifying the size especially in the toy industry and you know this cars and little um replica cars like hot wheels or matchbox the die-cast cars you could have the regular size the 116 you could have mini minis you could have the bigger versions that are used for models so the license actually and by the way you also mentioned sometimes it's a collectible it's a 200 or 500 limited edition that's a different definition of product than the ones that you would find it at math so it's very important because if you use an o as a license or if you use an over broad term you've just set yourself up for underperforming licenses why because there's other categories other things other companies could do that your licensee doesn't do um that you could be licensing to another company because the the company you're working with doesn't do it stickers um is a great example and what plush um do you want to tell the the story of the the key chain sure um so actually i'm going to jump to a squishy story um i had a gaming app and they said we really think squishies are huge right now we want to find a company that can make them so i had a master toy partner the master toy partner assumed that squishy toys are part of the toy contract but we also had a fan merchandise license and fan merchandise license wanted to make squishies um they were of the moment trending and collectible and we had a disconnect between the man the master toy and the fan merch and we had to work that out so that we could get squishies made for this company both thought they had the rights so again squishies and plush are we talking mini plush plush you know a backpack accessory or a keychain plush what what about if it was a backpack made of plush does it fall into backpacks or does it fall into plush and you might have signed two separate licenses and now all of a sudden there's a conflict because that person wants to do it in fact we have this issue we have a client that does uh a item that's a mask and a hat at the same time so when kids you know flip up their mask it actually becomes a hat or it could flip down and we had a lot of trouble getting the license of that because they already had a hat licensee and they already had a costume and mask licensing even though this product was never uh considered the licensor that we approached didn't even know what category to put this in is it a hat or a mask it was a hybrid um so really important that we're identifying being very clear because otherwise you're setting yourself for either underperforming licenses or conflicts and we always want to avoid um conflicts now one important note because we're going to talk about exclusivity in a couple of minutes this becomes vitally important in an exclusive license this is a little bit less important in a non-exclusive license why because if it's a non-exclusive you don't have that inherent conflict you could put the two vendors the backpack and the plush vendor side by side um and have both of them licensed but um if it's a an exclusive license it becomes uh all the more important that we focus on that um let's talk about um from licensed products let's jump to territory and channels of distribution and very often i put these two together but they could be very separate um territory obviously we're talking about a global deal are we talking about north america we talk about certain countries uh within south america or central america and i always like to because very often the question becomes is mexico south america or north america or central i always like america i always like to identify the specific countries that are included uh usa and canada very often are thrown in together but um they're very different markets so you may want to distinguish exactly what countries what uh territories or is it a global distribution right and when it comes to e-commerce it becomes even more glaring but i went we talked about the parties in the chain of title and the trademarks if you're gonna do a license bigger than the united states whether it's canada or the international interpreters very important that you check trademark clearance and that you have the trademarks filed in the other countries or at a minimum make sure it's clear that you're not infringing somebody else's trademarks in another country and i can't i can share a really current example of this um taking on a license for the united states did not include mexico as a territory requested to take mexico for the territory the brand is a very well-known food brand in the candy space but they didn't have we wanted to make stationery they didn't have a trademark for stationery in mexico they had a trademark for the candy brand very well known but not for stationary so we negotiated back and forth which is exactly what we're talking about here and asked for mexico asked for stationery and the client is ending up paying for the trademark registration even though my client won't own that trademark registration is paying for the license or his mark that's right so be prepared that if the license that you want doesn't have that trademark in that territory to protect both of you you're going to want to get that and as long as the license or approves it you might have to cough up some dollars for that yeah we did the same thing recently we had a uh we did a fubu license and obviously they own the marks in many categories worldwide especially you know in apparel bags and backpacks uh including south africa and we did a license for the fubu brand for south africa they the mark was fine in south africa but the license event asked for some of the neighboring smaller countries and especially countries that might not have existed 20 years ago um as they you know jiggle the geographical lines so there were a few countries where they might have had it in apparel but not backpacks we actually had our licensee take on the responsibility to file the trademarks in the name of the licensor and we worked with the licensees local council to get those trademarks perfected but we did the same thing where we required the licensee to pay for it and that led into the reps and warranties and and some of the legalese that we'll get into later because we didn't want to be responsible until that mark was officially registered uh the licensor didn't want to be liable and you mentioned mexico um i i had once heard that uh the brand under armour you think you know famous logo everybody knows the ua logo um that they don't own the logo in mexico because a very similar looking logo was owned by somebody else previously i think they own their name but the uh ua logo um might have been owned by somebody else but again when you get into international territory uh this becomes very important that we're looking at the trademark and the ip and who holds the who and let's say you go to a trade show and you know the territories you hold your marks in and some distributor walks up to you and says oh i want to buy that line and i'm going to distribute it in this country you have to make sure that you get clearance for that so you can sell to that distributor so you might go back to the licensor and say i would like to sell to this distributor in this territory they might ask you for more money or minimum guarantees but it has to be a request on the licensed door side if you have control over that brand you really have to think about what territories are you ready to expand into it might sound great to get an order in another country but be prepared that if you own that ip you're the licensor of that brand that you want to make sure it's marketed appropriately in that country and that it has awareness in that country because you don't want your brand to fail so you have to be really careful on both sides of this really really important and tied right into territory and very similar concerns uh channels of distribution and this becomes a huge discussion point because if some of the bigger licenses if you're doing a license with with a disney for example there are i believe close to 30 specific channels of distribution and you check off the boxes of the ones that are included but you know alita mentioned earlier amusement parks is a channel of distribution in and of itself everyone knows the obvious ones the department stores like macy's and jc penney's and dillard's better department stores nordstroms neiman's the off price they call them the big three tj maxx which also includes marshalls uh tj burlington uh ross but you know you also have bells and bells outlet in the in the off price world you have the specialty world bed bath and beyonds and michael's and joanne's um lowe's and home depot sporting goods channels of distribution uh clubs is one very often that's separated out because it takes a special uh company to do business at clubs uh home shopping qvc and hsn all of these channels of distribution we talk about amusement parks we talk about specialty um it's very important that you specifically define what you're intending and sometimes what you don't intend so if you have a high fashion brand a prada or a gucci you obviously don't want to allow that product to be sold at walmart or target um so your your price points become important your channels of distribution become important marty have a question i no i have a comment um and and for the students um who are in different parts of the world perhaps not the u.s you can apply what was just said uh stephen and elita you know talked about some specific chain names but depending on the retail structure wherever you are you have to you know the the lesson the lesson they're they're teaching is just as important um in terms of being very specific about defining who those retailers are or what the tier is but give examples of what is in that tier you know steven used the name jcpenney some people might think of that as a department store some people in the u.s context might think of that as mid-tier um so so it probably behooves you to get as specific as possible when you're talking about the chain you know the uh channels of distribution no matter where you are in the world so i just want to i just want to throw in that point because we have people who are not in the us so no it's a great point becomes sometimes even more important outside the us like you said some of our terminology is is commonplace and well-known when you're doing deals extra territorial uh sometimes specifically enumerating the accounts becomes uh even more important um or specifically saying the accounts where it's not uh you know not permitted or not desired like you know some of the lower end um channels of distribution um but we have one interesting thing and i know leader you have some thoughts on this okay thanks for having me feel free to come back anytime we had one interesting thing where we told the licensees uh in fact i represented the licensee at this time but the licensor told the licensee you're not allowed to sell at walmart this was a big denim brand that was very strong at macy's and the department store and the licensees for the accessories was not allowed to sell at walmart because the license or didn't want its brand there now fast forward two three years into the license the licensor took the denim brand to walmart so macy's of course is no longer buying the denim they're not buying the accessories and our licensee cannot sell at walmart so if you're on the licensee side and walmart or certain channels are excluded we should put in here's a tip and a technique you should put in a caveat so it's very important if you're the licensee and this is a good tip or tool or technique here um to use a right of first refusal here that if the license or put a provision if you're not allowed to sell a certain channel if the license or goes into that channel or allows its other licensees that you're also then allowed to go into those channels because otherwise it's possible not only are you not permitted to sell that but they can put another license either and that happens a lot with clubs some of the other more unique channels like home shopping where you might actually have a competing licensee uh in some of those other channels competing with your product um alita did you have any thoughts i think when we're talking about the different channels it's really important um to both identify and be on the same page with your partner right because these licensing deals your partnership you both parties want them to succeed so you both want to be on the same page as what the channels are sometimes a licensed door will actually give a very comprehensive list of all of the types of channels you know book stores and we started to talk about clubs or hyper markets as they're called in europe and understanding all of those different channels and they have a checklist so if you're the licensor you might actually want to provide a checklist to that licensee so they can check off everywhere that they have distribution on the flip side if you're a licensee you want to make sure because it's going to cost you in the end if you don't identify where you're selling if it becomes a surprise to the licensed or they could either reject when you are in the approval process and say no we don't want you to sell this to the dollar store um so they have to understand the price points when you go through that process which we'll talk about later they're going to want to understand why you're putting this product in this channel of distribution so you have to call out and it's going to help both of you to be really specific yeah the key is communication be on the same page we we had that situation recently where the licensee didn't have certain channels uh i believe it probably was dollar channels and they called and asked for we actually created a diffusion brand we allowed them to go to those lower channels with some older different product on the diffusion ram but when we did that amendment we didn't include that against their gmrs because we're going to talk about minimums and royalty so they had a certain commitment for the upper tier channel when they went to the lower tier channel we didn't include that uh against their deal so it became very augmented additional revenue to to the licensor um so communication there be on the same page and when there are opportunities communication is the key um exclusivity one of our next uh techniques uh or tools a red flag warning to a licensor and this brings us to our next point exclusivity and our first red flag warning this is a warning to licensors licensors do not ever grant an exclusive license that doesn't have performance standards i'm going to repeat it and then i'm going to explain it licensors do not ever grant an exclusive license that doesn't have performance standards and we're going to talk about what those performance standards are in a few minutes guaranteed minimum royalties or guaranteed minimum sales but if you grant an exclusive license and there are no performance standards and that's a three-year deal or worse even a longer deal with a right of renewal that's not tied to a performance standard you could tie up that license for three to six years and never make a dollar and in fact you would have to pay them to take your license back how do you solve that very easily we're going to talk about gmr and gms guaranteed minimum royalties and guaranteed minimum sales in a minute but there are times when you do want an exclusive license and if you're a licensee you may want an exclusive license so you're going to probably have to pay more that means higher guaranteed minimum royalties and minimum sales thresholds but that's a part of the negotiation there's nothing wrong with exclusive licenses per se um but if you're the licensed sword just make sure it's tied to a performance threshold that we'll talk about in a few minutes alita so when it comes to exclusive deals if you're the licensor you may want to grant more exclusive deals if you're working with a partner that you believe can cover all of these categories and can pay you the kind of guarantee that steven's talking about if you're the licensee you want to take exclusive deals because you don't want to have competition in the marketplace but if you own that brand and you're the licensed or you might not want to over saturate your brand by having too many licenses on the flip side you might want to have a lot of licenses out there and get as much and as many dollars as you can to hit every part of the market so let's say you're the nfl right and you're going to license t-shirts there are multitudes of t-shirt licenses for nfl t-shirts why because you want to go into dick's sporting goods or you want to go into walmart or you want to go on to amazon or you want to go on fanatics you want to go anywhere you can and you want to buy and the nfl wants to license all of that so they want to get as much as they can so they're probably going to have fewer exclusive licenses yeah same relationship you and you want one of those licensees you better come up with a plan of why you should get it what's special about what you do what's unique where's your price point what's your distribution do you have better retail relationships you have to think about why is a brand like that going to want to sell to you yeah the disneys of the world and the nfl's of the world in in licensing very rarely grant exclusive license except you know on field apparel maybe you know or these multi-billion dollar deals with reebok or nike but one of the other reasons that the bigger players in the entertainment space specifically don't grant exclusive licenses very often a certain retailer will choose whether or not they want to work with a certain vendor so if they would have granted an exclusive license and that vendor doesn't isn't a vendor of record to walmart or dicks or have you or the buyer doesn't want to work with that company they can that's another reason and uh there's also some bankruptcy concerns if we ever want to get technical on reasons not to grant exclusive licenses but very often um there are reasons to grant exclusivity when you're the license or there are reasons you want it as the licensee so it becomes a function of the dollars and cents and commitment and properly defining because i talked about exclusivity when we talked about product categories and channels of distribution properly defining those other terms and these are all functions of each other as you negotiate these deal terms they're all you know give and take on on all of these different points let's turn our attention to the term of the license and our second red flag warning of the day uh another tip and tool this one is in favor of the licensees licensees you always want to try your best to include a right of renewal i'll repeat it and then i'll explain it licensees you always want to try to take a license that includes a right of renewal why because if you don't have an automatic renewal right at the end of your initial term two years or three years whatever it is that licensor now goes to your competitors you are now caught in negotiating against your competitor for a market that you might have built you've built up the market and now you're at risk of losing the license and it's a double negative because not only do you lose that shelf space you lose that license but it ends up going to one of your competitors so they get stronger you get weaker and you you took two years three years to develop that market that retailer you got your first test order you then went into you know 60 doors 100 doors now in the third year when you're finally building this great program you're either gonna have to pay higher money pay higher guarantees royalty rate or risk losing a license so um always try to put in a right of renewal a minimum a right of first refusal um on the on the renewal term alita what are you seeing typical terms of licenses yeah so i'm seeing two to three years typically but what's interesting is you can also schedule in when you're taking a license or you're giving a license development time so for example let's say today stephen and i are going to work out a licensing deal right well it's already what are we in almost october right so if we're in october and we want to develop for 22 2023 maybe 2024 we can use three months six months really before we're really ready and extend the license so think about the end date it doesn't have to be three years from today what are we on september 30th that we're doing this um but we can think about what's the ending i think we're gonna have to edit that out right all right let me go back okay um when you're thinking about the term you can schedule in development time so let's schedule in a few months that you can develop it think about the end date of the term is it a product or service that is going to expire usually the end of the year like after a big holiday or season or event think about the end term and then give yourself if you can a few months of development time because all those months that you're working on development and approvals and going back and forth you're not making money the license or is not making money the licensee has nothing to sell yet so if you can think about the term inclusive of the development time that you need yeah we like to do and you and i have worked on it before the extended first year very often the first license year can be an 18-month term but really important like like a leader said because if you're negotiating a license and let's say you're in the fall uh you know us uh time the january through uh june is already booked you're not gonna get into a retailer for for the first half of next year so use that time as the development time and make the license run through you know the middle of the next year try to do an 18 month or an extended first year to account for development time and the retailer lead time when they have their open to buy when you can get onto the shelf so we're seeing three-year deals a lot um i've seen two i've seen i've seen five-year deals with a five-year renewal um but uh that extended first year is a really important point and that ties right in to uh the launch date and the marketing or or on shelf date because here's where things and delays can get a license off to a really bad start so the one important thing is that both the licensee wants to know when they're going to get to market but more important the licensor wants to see the licensees starting to take steps to develop market and get that product to market as soon as possible so we use a marketing date and a shelf date or a delivery date to hold that schedule for the initial launch because otherwise it's very easy for this to get pushed on the back burner oh we're going to get to it we had delays i saw an email this morning that said oh because we've had some delays in shipping uh we haven't started our product development yet but they have a marketing date of uh october 1st so they they haven't even done product development yet now this is three or four months into that license so those dates uh hold the licensees feed to the fire yeah and you can think about your industry that you're in if you're the licensee you know when is the trade show you're going to exhibit at or when do you have your big retailer meetings and then you can think about okay well then how long is it going to take me to have the product ready to ship how long is it going to take before the retailer can get it onto the shelf if you're if you have domestic product or it's internet let's say you manufacture internationally you think about but you're going to ship to retailers in a country where you need to have the product in that country you're going to have to make time ship the goods in warehouse them and then ship them out to the retailer so you have to think really carefully about when is realistic that you can have that product on the shelf and think about the marketing date as when can you first show that product can you talk about it can you issue pr that you just got this license can you go to a trade show and make a big beautiful splash about this brand that you have those are considered towards the marketing of the property and one thing i'll say beware about a lot of the big brands have an implicit built-in extra percent marketing fee that has a licensee you might have to pay so when you get into those deal terms it might be in there and that's an extra cost so if you have a 10 royalty rate which we'll talk about rates there might be a one percent add-on that you have to pay for marketing and that's a perfect segue into our next slide um this is the nuts and bolts of licensing take a deep breath because we're now getting into the key financial deal terms and the magic word royalties so a leader at a perfect lead-in let's talk about royalties those are the payments from the licensee to the licensor in return for the right to use the intellectual property the licensed property for the licensed products for the term in the territory and channels of distribution the royalty rates a leader just threw out the number 10 percent what's an appropriate royalty rate and what's it based on i've seen royalty rates as low as two percent and as high as over 20 in fact the biggest deal i ever saw was a 22 uh under armour deal and it was probably worth every penny to put the under armour logo on those uh i think it was socks and underwear um but the product was great and adding that logo made it an even better product that's a huge spread of 2 to 22 and then of what is it based on the wholesale is it based on the retail how is the licensee selling if the licensee sells wholesale to the retailers those channels of distribution we talk about then you have to pay your net sales definition to wholesale if the licensee is selling direct to consumer on amazon or their own website or e-commerce you want to peg that royalty rate to a retail definition so it's very important that we're getting the appropriate rate and the appropriate um basis and then what is the appropriate rate between those ranges well that's always going to depend on the property are we talking about disney or warner brothers are we talking about a new property that somebody just created um are we talking about a fashion brand are we what industry are we in uh what is the product and the margins on the product there are some products that are consumables things like coffee that are very narrow uh margins uh especially things that are distributed through the supermarkets or uh is it a high margin like some high-end jewelry high-end handbags even high-end fragrances you know that are selling two three four hundred dollars and the cost of goods might be twenty dollars so there are huge margins so what's the appropriate rate and this is where uh leeda always likes to say work with an agent we have chart means we have uh you know great resources at our disposal that talk about where the royalty rates lie based on products based on properties so you really want to make sure you understand the industry the industry that you want to sell in and understanding where the rates could fall so an entertainment property is going to have one set of rates right but a uh a property where let's say an inventor let's say you make the next salad spinner right you're the inventor and you're gonna license your invention to a big company right your royalty rate there is where stephen says you know a two percent might be a play or you're an artist but you're going to get that percentage for the life of that contract right so you might be very happy getting that or let's say um a brand is super strong well-known global brand and they want to charge a really high royalty rate but you come to them with a brand new type of license that they haven't had before they might be willing to lower that royalty rate to work with you if it's an area a new area they want to get into so it truly is a negotiation if everybody knows this brand costs xyz and you're coming with something that they haven't had and they want to get into that they might lower that so it's a negotiation another place this comes in is you don't want the royalty rate to be too high that you can't sell the product right it's even like this one if you build in a royalty rate and you think about the margins of the product and what that product has to retail for for everybody to make a little money in this you can't set the royalty rate too high because if it's a very inexpensive product there's just not enough margin in it and the last thing i'm going to say before stephen jumps in with one of his examples on the rates is tariffs depending on where you're making the product believe it or not it's going to affect what rate you're going to pay because if you're making a product that you want to sell let's say to the dollar stores right or to an impulse type of section in a store and that is going to be a very inexpensive retail price point you need to look at what those customs and duties and tariffs are going to be to import that product from the country where you're manufacturing it because on some items you may pay no duty certain toys have no duty right but on you know handbags or other categories in a stationary arena all of a sudden 15 you could be paying you could be paying a crazy amount and you need to think about how it all works together in your financial model yeah the tariffs and and cost of goods and margins are key you know in this in this analysis but uh it's funny that you brought up tariffs because one of the solutions again another technique another tool you can use if you get into a stumbling block on royalty rate negotiation is the last bullet point in this group the tiered royalty rate so one potential solution um when you get into a roadblock somebody wants six somebody else wants eight you know in in these negotiations and you're you're deadlocked you can do a multi-tiered royalty rate and it could be based on a number of things very often we tier the royalty rate based on channel of distribution so when you're selling to mass or off price or club where margins are less the royalty rate's a little lower but if you're able to get specialty score retail direct to consumer department store business where the margins are higher you can afford the licensee can afford to pay a higher royalty rate so a tiered royalty can be based on channels of distribution it could be based on product or we did one deal a lady you mentioned the tariffs we were negotiating a royalty deal for handbags a couple of years ago right when there was the the big issues with china and huge increases to tariffs and we did a tiered royalty rate because everybody expected tariffs to come down again and subsequently they have in the license agreement we have a different royalty rate paid to the licensor if tariffs are over a certain percentage for handbags and a higher royalty rate if and when tariffs came down so we can be very creative here in finding ways around stumbling blocks by using a tiered royalty as a solution to to a roadblock uh and then one other note fob very often you're going to see the words the letters di direct import or fob royalty rates what are they and why are they different well very often a retailer a walmart or a costco or home depot they may buy the product from the manufacturer in china and then they're responsible for bringing it over so they pay a lower price the cost of the tariff the cost of the shipping and insurance is not built into the price so the price they pay is lower and then the retailer has to pay those extra costs so since the price is lower but the amount of profit that the manufacturer gets is the same in order to make up that money to the license or they charge a point or two points generally higher for fob deliveries when they're uh turned over title is turned over to the retailer in a foreign country and then they the retailer imports it's called fob or a direct import program uh elita what are you seeing in advances and payments on signing so the licensee wants to pay the least advance that they can the least amount of money they can to get that license and the license store wants to make it advantageous that everybody has what they this phrase is used over and over again skin in the game right so by paying the advance the licensing is showing i'm going to give you some money right now to be able to work on this license and the license store is saying listen i don't want to you know break the bank here but we need something to know that you're going to work on this so that's where the advance comes in i'm seeing advances you know in the years ago you could see giant advances um literally and i'm talking like tens of thousands of dollars of advances today the economy is a little bit different so depending on where we are with the economy when you're seeing this video you you could pay easily you know five grand for a license 10 grand for a license but it depends on what your what you're asking for how long and what's going to happen is the licensor is going to ask you for projections so you really have to think about where you're going to sell this and what you do is you're going to project out the sales you think you can do and part of the that you're going to apply a percentage and figure out a guarantee and then part of it's going to be at the advance the overall guarantee you're going to pay at the end of the term or by the end of the term or along the way to the end of the term and the advance is that piece you have to pay up front usually upon signing yeah so the advance is something you have to pay on signing and the big guys the the disney's and the nfls we've talked about they're still getting their 50 hundred uh i've seen uh advances even greater than that but i i don't think nfl is doing a deal these days without a 100k upfront on signing so the advance is the licensees uh commitment they're showing they have skin in the game that payment to the license or why does the license or require that advance uh two reasons one they want to make sure the licensee is committed number two uh they're tying up their license now they're gonna spend time and resources sharing brand assets going through product development working with the licensees to get that product to market they want to make sure that they have some payment upfront uh that ensures the licensee's commitment and covers a lot of those costs so what are the best ways a licensor protects themselves in the license agreement it's the advance on signing and guaranteed minimum royalties gmr the two terms we're going to talk about the difference between guaranteed minimum royalties and guaranteed minimum sales in a minute but let's start with a guaranteed minimum royalty and a guaranteed minimum royalty is the licensee skin of the game those are monies that must be paid annually off of the term and we're going to talk about a trend we're seeing in a second the monies that must be paid from the licensee to the licensor annually offer the term of the license agreement and you have a guaranteed minimum royalty now if your sales are excellent and your royalties are above the gmr the guaranteed minimum that becomes meaningless but if the licensee falls flat doesn't get the distribution doesn't even put in the effort they're going to owe that money regardless of the level of sales the license or can count on that guarantee coming in year after year and the licensee has some real monetary financial obligations under the contract um it really ensures that the licensee is going to put in the effort and again guaranteed minimum royalties they're always a function of the projections and the sales and the advances are a function of the guaranteed minimum royalties um but this is a very strong tool that we see in most licensed agreements are there some without a guaranteed minimum royalty yes we just did one without a gmr but we did have a gms and you heard my warning earlier if you don't have one of those two it better not be from the licensors perspective an exclusive license agreement the licensee of course wants to lower these as much as possible the guaranteed minimum sales are guaranteed sales levels see sometimes a licensed source says hey but i'm not just in this for the guaranteed minimum royalty i want you to do much better and if you can't do much better then i may want to take this license somewhere else so or the licensee could say hey listen i think i'm going to do 5 million dollars in sales or 10 million in sales or 1 million whatever it is the license i think i'm going to do it but i'm not gonna guarantee a payment to you based on that optimism and therefore if i don't do it you have the right to take the license back so guaranteed minimum royalties and guaranteed minimum sales accomplished two different purposes the guaranteed minimum royalties is the payment the licensee can rest assured they're going to collect the guaranteed minimum sales is a tool that allows the licensor or the licensee to terminate the license agreement if they're not able to achieve a certain thresh sales threshold they're not going to get the money but they're going to be able to terminate the license and maybe go somewhere else now a lot of novices think these have to be matched so guaranteed minimum sales is x royalty rate is 10 therefore gmr is 10 of the gms they don't have to be equal in fact because they serve two different purposes uh it's probably better that they're not you can be much more aggressive on the gms as a licensee then you would allow the gmr which is money you're gonna have to pay out um but again make sure you have one of these the red flag warning one of these two performance thresholds or both if it's an exclusive license um alita what are you seeing in cross-collateralization and term deals these days and what are those terms no i'm seeing a lot of no cross collateralization so basically the license store wants to make sure that you are sticking to the payment schedule including the guaranteed minimum royalty so maybe at a certain date every year you have to come up with a certain payment and when it comes to the following year or the year previous you can't look back or look forward and carry over and that's where the cross-collateralization comes into play with the guaranteed minimum royalties i'm seeing them now more than ever usually you would say three-year deal here's the royalty percentage as you're selling you apply the royalty percentage you make your payments on a quarterly basis and it just rolls forward until you have to get to a point to renegotiate for a renewal or not now what i'm seeing is a lot of deals where they're like nope every year you have to make me a payment of this amount no matter what and it's that's really it could be pricey if you're the licensee you have to figure out am i going to be able to make that payment do i want the payment to increase or decrease right am i going to sell more of the product because it's a hot product a hot commodity and every year i'm going to sell more because the brand is building and it's going to go up or is it going to be like a one and done right it's a trend and you get in there and you sell it and then the next year not as many people want it anymore so you want it to go you want it to go down you wanted to go the other way so i'm seeing definite payments um do um you know no cross-collateralization and um and end dates with um renewal terms that are you know not automatic which we'll talk about those right so um cross-collateralization just for people who haven't heard that term that means can you collateralize your guaranteed minimum royalties versus your actual royalties year to year so if you didn't hit it one year but you were over in the next year can you use those to offset meaning it's almost the same thing as a term deal is it going to be you owe i'm just using easy numbers 50 000 guaranteed minimum royalties a year for each of three years which if you fall below one year you still owe the difference even if you were over the other two years or is it a term deal instead of 50 50 and 50 can you cross-collateralize as long as you paid 150 for the full three-year term um and there are some some trends and again this is a function of the negotiation um of uh the posture of and the the leverage between the licensor and the licensee the more you ask for in products channels of distribution exclusivity the higher the gmr and the gms are probably going to be so that brings us to the last point uh on the deal term sheet of course you could talk about things like marketing requirements and other special terms but just make sure you also have something about the reporting and auditing provisions alita mentioned are the gmrs due quarterly or annually or term how often and when are your reports due 20 days after the quarter 30 days monthly it's important that you mention the reporting marketing requirements or special terms in the term sheet and then once you have the term sheet if you go to the next slide steve once you have the term sheet those things get wrapped up into the long form license agreements and this is a lot of the legal leads we're going to take a break here hope you enjoyed the first part of today's session but then we're going to get into some of the legalese in the long form in the next part great uh thank you steven oleda um as steve mentioned uh there will be a part two to this presentation that will be in the same folder um and uh we'll resume that in part two