In licensing, the licensee pays the brand owner a royalty, a percentage of the sales of licensed products, and usually commits to paying a minimum guarantee regardless, part of it in advance on signing. The royalty makes the licensor’s income grow with the product’s success; the minimum guarantee protects the licensor if sales go badly. These are the first two items to be negotiated, and the ones that decide whether the deal is sustainable for both sides.
What the royalty is calculated on
The most common base is the licensee’s net sales of licensed products: the price at which it sells them to distributors and stores, minus returns and the discounts agreed in the contract. Less often, the retail price or a fixed amount per unit is used. The base must be defined precisely, because the same percentage applied to different bases gives very different amounts: the contract has to say what is deducted (returns, discounts, VAT, shipping) and what isn’t.
What percentages you see
One Italian law firm gives a general starting range of 2% to 10% of net revenue, often around 5% (Studio Legale Coviello). Treat it as an order of magnitude only: actual rates vary widely with the strength of the property, the category and the channel. The right percentage for a deal depends on a few specific things:
- Strength of the property. A character or brand that sells on its own is worth more than one that still has to be built.
- Category and margins. Low-margin, high-volume products, like many food products, can bear lower percentages than high-margin products.
- Exclusivity and territory. Exclusivity in a category or a country comes at a price.
- Channel. Mass retail, specialty stores, online and export can carry different percentages within the same contract.
What a minimum guarantee is
The minimum guarantee is the amount of royalties the licensee commits to paying over the whole term of the contract (or for each year), even if sales don’t reach it. Part of it is often paid on signing as an advance, which is then deducted from the royalties earned. If royalties exceed the minimum, the licensee pays the difference; if they fall short, it pays the minimum anyway on the agreed date. The minimum helps the licensor choose companies that really believe in the product and avoid locking up a category with a partner that doesn’t sell.
An example with hypothetical numbers
The numbers below are made up to explain how it works; they don’t come from one of our contracts. A company licenses a character for a line of cookies: an 8% royalty on net sales, a minimum guarantee of €60,000 over two years, and a €20,000 advance on signing.
- Year one: €300,000 in net sales, so €24,000 in royalties. The €20,000 advance covers most of it: the licensee pays another €4,000.
- Year two: €350,000 in net sales, so €28,000 in royalties. Total royalties are €52,000, below the €60,000 minimum: at the end of the contract the licensee pays the missing €8,000.
If instead it had made €500,000 in net sales in year two, total royalties would have been €64,000: the minimum would have been exceeded and there would have been no balancing payment.
Reports and audits
At fixed intervals (often every quarter) the licensee sends a report with units sold, sales by channel and country, and royalties due. The contract usually gives the licensor the right to audit the accounts, including through an auditor. Clear reports from the start prevent disputes later, and show which products are working and where to extend the license.
What to decide before talking numbers
Before the percentage come categories, channels, countries and term: they determine how much the licensee can sell, and so what minimum is realistic. A minimum that’s too high drives away the best partners; one that’s too low leaves the category idle. The legal side of the contract must always be written with a lawyer; a licensing agency’s job is to get to that table with numbers that make sense for both sides. If you haven’t read it yet, start with our guide to what brand licensing is and how it works; the technical terms are in the licensing glossary.
