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How To Negotiate Minimum Guarantees

by | Nov 22, 2023 | 0 comments

Master the art of negotiating minimum guarantees in business deals

Please note, I’m not a patent attorney. I’m not giving you legal advice. I’m going to give you my business opinion.

When I license my product idea to a company (a licensee), they gain the right to manufacture, market, sell, and distribute my product. In return, they pay me a royalty for each product they sell.

Let’s talk about something really important in this licensing game – performance clauses. These are like the ground rules of the partnership, and they are crucial for me as the inventor. In plain terms, if the licensee, which is the company, doesn’t perform, I want my product idea back.

In simple words, minimum guarantees are a must to make sure things go right in this whole arrangement.

Understanding Minimum Guarantees

There are various types of performance clauses, but the one I favor is tied to sales. If they fail to reach a certain volume of sales per quarter, they risk losing the rights to my product. This is commonly referred to as “minimum guarantees”.

If, for any reason, they decide to shift focus to another product idea, face manufacturing issues, or even go out of business, I want the right to reclaim my product idea in order to license it to another company for revenue.

Regardless of whether it’s a non-exclusive or an exclusive agreement when you grant someone the right to manufacture, market, and sell your product idea, they must meet certain performance standards to maintain those rights.

For exclusive licensing agreements, this is an absolute must. Without a performance clause, the licensee can retain the rights indefinitely without making a single sale, which is unacceptable. In non-exclusive agreements, they could still retain the rights, but you wouldn’t be able to grant exclusivity, significantly reducing its value.

From our perspective as the inventor or licensor, it’s entirely reasonable to want the flexibility to license our product idea to another company if the current licensee fails to perform.

Now, let’s consider the standpoint of the licensee, the company. It’s understandable why negotiating minimum guarantees can be challenging for them. They’ve invested significant time, money, and inventory in producing your product. During this process, they might encounter delays in bringing it to market. Due to the performance clause tied to sales (minimum guarantees), they might risk losing the rights before making any sales or failing to reach the required sales quantity.

Calculating Minimum Guarantees

Typically, minimum guarantee clauses come into effect around 18 months after the licensing agreement is signed. This provides the company ample time to manufacture and distribute your product. However, unforeseen circumstances might lead to delays, which is why they may not favor minimum guarantees.

Now, how do you go about calculating minimum guarantees? For the first year, I’d suggest setting it at around 25% of projected sales. You can determine projected sales by either asking them directly or making an educated estimate. Consider factors like how many stores will distribute your product, and assume a weekly sales rate.

Remember, royalties are calculated based on the wholesale price. I personally use the standard 5% royalty rate. By doing the math, you can get a good estimate of your potential revenue for the first year. This serves as a solid starting point. Then, take 25% of that estimate to establish your first-year minimum guarantees.

You can then increase this figure by 50% for the second year, and possibly further for subsequent years. Starting a bit lower in the first year is advisable. It makes it easier for the licensee to meet the minimum guarantees, and it’s also simpler to negotiate a lower figure for the initial year.

Overcoming Challenges in Negotiation

It’s important to note that most licensees might not be thrilled about minimum guarantees. If you find yourself encountering difficulties with this aspect of the licensing agreement, consider inquiring about the smallest quantity of units they would be willing to produce before discontinuing your product.

Negotiating minimum guarantees is not a straightforward task. I strongly advise working with a professional with knowledge in this field. The ultimate objective is to arrive at a price that all parties can accept. You simply want the ability to reclaim your product idea if the licensee fails to meet their obligations.

Author

  • Stephen Key

    Stephen Key is an award-winning inventor, renowned intellectual property strategist, lifelong entrepreneur, author, speaker, and columnist.
    Stephen has over 20 patents in his name and the d...

    View all posts Intellectual property strategy, product licensing, and entrepreneurship.