Total Licensing

Legally
Speaking
TOTAL LICENSING
How to set Payment Terms
in a License Agreement
Basics of Licensing publications
There has perhaps never been a more exciting time
than now for those involved with the business of licensing
intellectual property rights. Even in a soft
economy, people everywhere continue to embrace
forms of entertainment across every genre and to
identify strongly with the branded products that express
their lifestyles. Moreover, with new digital technologies
making it possible to reach a consumer base
that seemingly grows by the day, the overall profit generating
potential of brand-extension and merchandising
activity remains anyone’s guess.
For the entrepreneur seeking to take advantage of
this lucrative marketplace, however, navigating its
ever-evolving landscape absolutely requires a sound
grasp of the business and legal principles that are the
bedrock of every successful licensing program; hence,
the Basics of Licensing book series.
The series began with the original Basics of
Licensing, is followed by the sequel Basics of Licensing:
Licensee Edition and continues with the Basics of
Licensing: International Edition. Each book has been
developed in cooperation with (LIMA). For copies, visit
www.basicsoflicensing.com
Gregory J. Battersby
Battersby Law Group, LLC
25 Poplar Plains Rd. Westport, CT 06880
(203) 454-9646 • (866) 579-9591 (Fax)
gjbattersby@gbiplaw.com • www.gbiplaw.com
By: Gregory J. Battersby, Battersby Law Group LLC
For first time licensors (or licensees) setting
the payment terms, i.e., royalty rates, guarantees,
advances, etc., can be a daunting task.
There is, however, a relatively simplistic way
to set these numbers which works in many
instances.
Step one is to negotiate the royalty rate. Royalties
are generally based on a percentage of
the licensee’s wholesale sales of the licensed
products. Like other costs associated with
the creation of the licensed item, royalties are
factored into the retail selling price as a cost
that is passed on to the consumer.
Unlike tech transfer and patent licensing
where many deals are unique, in the merchandising
area there are usually pre-existing average
royalty ranges for similar types of properties.
Whether the royalty agreed upon by the
parties falls within the average royalty is often
a reflection of consumer demand. Greater demand
typically results in a higher royalty, while
less popular properties usually command royalties
that are at or below the average royalty
rate.
Consideration should always been given to
the fact that the royalty rate will affect the retail
price. Thus, charging too high a royalty can
actually have an adverse effect if it inflates the
retail price of a licensed product above what
the consumer is willing pay for such product.
There are at least two studies of royalty rates
for the merchandising industry, one of which
is the Wolters Kluwer study that has been
published for the past 15 years entitled Licensing
Royalty Rates and has been endorsed
by LIMA. This study tracks royalty rates for
eight different categories of licensed properties
as applied to more than 1500 types of licensed
products. The following is a summary
of Licensing Royalty Rates 2016.
Once the royalty rate is negotiated, the negotiations
for the guarantee and advance should
fall into place. Ask the licensee to project
their potential sales; apply the agreed upon
royalty rate against these projected sales; and
then ask for a guarantee in the 50% range of
projected sales with half of the guarantee paid
as an advance. It can be that simple. Moreover,
it also flushes out whether the licensee is
being honest with its projections since these
payment terms are being based on the numbers
that they provide the licensor.
Licensing Royalty Rates 2016 is available on
wklawbusiness.com/store or by calling
1-800-638-8437. LIMA members are entitled to
a 40% discount off its normal $595 price by using
code LIMA16.
AVERAGE
ART CELEBRITY ENTERTAINMENT COLLEGIATE CORPORATE FASHION EVENTS SPORTS
ROYALTY RATES
Average Range Average Range Average Range Average Range Average Range Average Range Average Range Average Range
% % % % % % % % % % % % % % % %
Cosmetics N/A N/A 10.0 5-12 8.0 5-10 8.0 5-10 7.0 5-8 7.0 5-10 8.0 5-9 7.0 4-7
Pharmaceuticals N/A N/A 9.0 5-10 6.0 5-9 N/A N/A 4.0 4-8 N/A N/A N/A N/A 8.0 5-10
Metal Goods 5.0 3-6 10.0 7-14 11.0 7-16 10.0 7-12 9.0 5-12 6.5 4-10 10.0 8-12 10.0 9-12
Electronics, Software 4.8 3-6 10.0 1-12 9.0 2-16 10.0 7-12 8.0 3-10 5.0 4-8 10.0 8-12 10.0 9-12
Jewelry 5.0 3-9 10.0 5-14 11.0 7-16 10.0 6-12 10.0 5-12 7.0 5-10 12.0 10-14 10.0 9-12
Gifts 6.5 4-9 10.0 6-12 11.0 7-16 10.0 6-12 8.0 6-12 7.0 4-9 12.0 8-12 10.0 9-12
Stationery/Publishing 6.0 3-12 10.0 5.10 11.0 7-16 10.0 7-12 9.0 10.0 9.0 5-15 12.0 10.14 10.5 9-12
Leather Goods 5.0 3.5-5 10.0 6-12 11.0 7-16 10.0 7-12 8.0 6.5-9.5 7.0 5-10 11.0 10-14 10.0 9-12
Housewares, Bedding 6.0 3-12 9.0 4-10 11.0 7-16 10.0 7-12 8.0 5-9.5 8.0 4-11 12.0 10-14 11.0 9-12
Apparel 6.0 3-12 10.0 7-15 12.0 7-16 10.0 8-18 11.0 6.5-12 8.5 4-12 12.0 10-14 11.0 9-12
Toys, Sporting Goods 5.0 3-6 9.5 5-10 11.0 8-16 10.0 7-12 10.0 5.12 7.0 4-10 12.0 10-14 10.0 9-12
Foods 2.5 1-4 3.0 2-4 4.0 3-8 2.5 3-10 4.0 3.5-8 N/A N/A 3.0 3.8 3.0 3.8
Non-Alcoholic Beverages N/A N/A 4.0 1-9 3.5 2.5 N/A N/A 4.0 3-7 N/A N/A 5.0 3-7 5.0 3-6.5
Alcoholic Beverages N/A N/A 5.0 1-10 5.0 1-4 N/A N/A 5.0 3.8 N/A N/A N/A N/A 6.0 5-9
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