[Jim wraps up with the basics of a licensing agreement before turning to common misconceptions about licensing in tomorrow’s post.]
3. Performance—Make Sure they Practice what they Preach
Performance requirements need to be in every license agreement. These include, but aren’t limited to, an introduction date, minimum royalty payments and an anti-shelving clause.
The introduction date is the date by which the licensee will have your product manufactured and ready for sell. The introduction date will vary depending on the complexity of the product. Remember, nothing ever goes as planned. Make sure you have a reasonable cure period for the introduction date. Usually 30-90 days depending on the complexity of the product.
Minimum royalties also need to be included in a license. The exception is a non-exclusive license. If a company can’t meet minimum annual sales targets, you might want to terminate the license, or convert it to a non-exclusive license. Also, you always want to make sure your licensee is continuously marketing and selling your product. Unless the product is seasonal, the licensee should be able to meet some portion of the minimum annual royalties in each quarter. For example, let’s say a licensee has an exclusive license with a minimum annual royalty target of $100,000 and they only sell enough units to pay $90,000. You would expect the licensee to pay an extra $10,000 to maintain the exclusive (the licensee might want to credit this against future royalties). If they refuse to pay the extra $10,000 you could terminate the license or make it non-exclusive. However, you want to be careful before terminating a license because it means you have to start all over again with another licensee (assuming the license is exclusive), if you can find one. Certainly if the licensee only sold enough units to pay $40,000 in royalties you would want to at least make the license non-exclusive and perhaps pull it entirely. Also be conscious of what is going on in the market in general. If macroeconomic conditions are hurting all products in the category, it probably isn’t the fault of the licensee that sales are slow. Minimum royalties are the toughest terms to negotiate. You want to be fair and reasonable. A tactic I often use is to ask the licensee how many units they would need to sell each year to keep the product in the product line. Companies drop products all the time because they don’t meet internal minimums. Your product should be no different.