Sales Efforts The licensor will want to insure that the licensee makes a good faith effort to manufacture and sell licensed products, particularly if the license is exclusive.

What’s Included in a Merchandising Licensing Agreement

Some of the provisions that can be used to insure licensed product sales are as follows: Guaranty. The licensor can require the licensee to guaranty that royalties will reach a certain amount. If total royalties do not reach that amount, the licensee will be obligated to pay the difference to the licensor. A portion of the guaranty may be payable as an advance, and the guaranty may be allocated on an annual basis over the term of the agreement.

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Minimum Sales Requirements. A guaranty will insure that the licensor receives some compensation for the license, but it may not insure that the licensee will actively sell licensed products. For example, a licensee may decide that it is more cost effective to pay the guaranty than to manufacture and sell licensed products, especially if the licensee enters into a license for other potentially competitive products that offer a greater profit potential. In order to prevent this from occurring, a licensor can also include annual minimum sales requirements. Product Introduction and Sale Dates.

For some categories of products, failure to exhibit prototypes at an annual industry trade show such as Toy Fair, held each February in New York will effectively keep the licensed products out of the marketplace for another year. In these situations, the licensor will want to require that the licensee introduce a certain number of styles of the licensed products at the appropriate trade show. The licensor will also want to require that shipments of products begin no later than whatever date is determined to be the deadline for the appropriate peak marketing period e. Failure to meet any of these dates will be grounds for termination of the license.

Advertising Commitment. The licensor will often want the licensee to commit to spend a certain amount, usually calculated annually, for advertising for the licensed products. The agreement should list the types of expenditures that will be included or excluded in satisfying the advertising commitment.

Some licensees may offer a large advertising commitment in lieu of or as a partial credit against a guaranty. Partial Termination. In some cases, a license may cover several different licensed product categories, territories or channels of distribution. The licensee may prove to be quite proficient in some of these categories, territories or channels of distribution, but may have little or no activity in others. In order to prevent segments covered by the license from lying fallow, the licensor may want to reserve a right to terminate the license only as to that segment if: i activity does not begin in that segment by a certain date; or ii activity in that segment does not reach a certain level by a specified date or remain at that level for a specified period of time.

Royalties In negotiating the compensation for a licensing deal, it is important to look at both the royalty percentage and the base against which that percentage will be applied. The license agreement should address all of the following issues with respect to the calculation of royalties: Royalty Rate. Rates will vary depending on the type of licensed property, the type or types of licensed products to be manufactured, the current or anticipated demand for the licensed products, and the track record of the licensor.

Entertainment and sports properties and single event properties tend to command higher royalty rates than fashion, art and corporate trademark properties. Food products tend to yield a lower rate due to the generally low profit margins in the food industry. A licensor may want to include royalty rate escalators based on the number of units sold or the amount of net sales proceeds received. Royalty Base.

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In most cases, the royalty will be determined by multiplying the royalty rate by the "net sales" of licensed products. The starting point for determining net sales is usually the wholesale price of the licensed products. The problem comes in identifying items that will be permitted to be deducted from the wholesale price to arrive at net sales. The licensor will want to limit deductions as much as possible, and may want to put a cap on the total amount that can be deducted. Any deductions that are allowed should be reflected on sales invoices or other records that can be easily audited by the licensor.

In most cases, the licensor will expect the licensee to ship licensed products from the manufacturer's factory to the licensee's warehouse, and then sell those products from the warehouse to retailers. Under this scenario, the licensee's wholesale price will be set at a level that will be sufficient to cover manufacturing and shipping costs and the royalty paid to the licensor, and still provide some profit margin for the licensee. All trademarks subsequently adopted and used by Licensee under the provisions of this Agreement shall be deemed to be Trademarks and owned by Licensor except as otherwise expressly provided in writing by Licensor.

Nothing in this Agreement shall confer upon Licensee a proprietary interest of any kind in and to any of the Trademarks or any trademarks or trade names confusingly similar thereto. Any and all use of any of the Trademarks by Licensee shall inure to the benefit of Licensor. All figures and monetary amounts reflected in the royalty statement shall first be stated in the currency in which the sales were actually made.

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Next to each currency amount shall be set forth the equivalent amount stated in U. Dollars, and the rate of exchange used in making the required conversion calculation as required under this Agreement.

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No other costs incurred in the manufacturing, selling, advertising, and distribution of the Licensed Products shall be deducted nor shall any deduction be allowed for any uncollectible accounts or allowances. If Licensee or any other person is required by law to make any deduction or withholding on account of any tax, assessment, duty, or levy charged against any payments to Licensor under this Agreement, Licensee shall pay such tax, assessment, duty, or levy before the date on which a penalty for nonpayment or late payment attaches.

Payments by Licensee to Licensor with respect to which the relevant deduction, withholding, or payment including any penalties is required will be increased to the extent necessary to ensure that, after the deduction, withholding, or payment of such tax, levy, duty, or assessment is made, Licensor receives on the due date and retain free from any liability with respect to the deduction, withholding, or payment a net sum equal to what Licensor would have received and retained had no such deduction, withholding, or payment been required or made, provided, however, that Licensee shall not be obligated to increase its payments to Licensor if the relevant deduction, withholding, or payment is expressly required by law with respect to the types of payments due under this Agreement from Licensee to Licensor and relates exclusively to income taxes potentially due from and payable by Licensor to the taxing authority of the country in the Licensed Territory.

If any tax or withholding is imposed on Royalties, Licensee shall obtain certified proof of the tax payment or withholding and immediately transmit it to Licensor.

Dollars, unless Licensor specifies otherwise. All payments under this Agreement shall be calculated in the currency of the country where the Licensed Territory is located and then converted into U. Dollars for payment to Licensor and shall be converted at the spot currency rate announced by the Dallas, Texas office of Citibank in the United States or any other United States bank or financial institution Licensor designates in writing.

The rate used will be the rate that was in effect as of a. Dallas, Texas time on the business day before the date payment is due. All payments made under this Agreement shall be made in full, net of any bank charges. Licensee will bear all of the costs and expenses of and obtain any required governmental authorizations in connection with obtaining U. Dollars and making required payments. Licensee shall provide detailed conversion calculations with every payment submitted hereunder.

If, by any reason of any governmental or fiscal restrictions effecting the convertibility, payment cannot be made in U. Dollars of all amounts payable under this Agreement. If any legal restriction at any time prevents Licensee from paying in U. Dollars, Licensee shall notify Licensor immediately. While such restrictions are in effect, Licensor may require payment in any currency it designates that is available to Licensee.

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Alternatively, Licensor may require Licensee to deposit all amounts due but unpaid as a result of such a restriction in any type of account in any bank or institution Licensor designates in the country where the Licensed Territory is located. Licensor shall be entitled to all profit earned on such deposits. In the event that Licensee combines or bundles any Licensed Product with non-licensed goods or services, the Royalty due Licensor will be based on the proportional value of the cost of goods of the Licensed Products as a percentage of the cost of goods of the bundled product including the Licensed Products.

In addition, Licensor and its duly authorized representative have the right, during normal business hours, for the duration of this Agreement and for three 3 years thereafter, to examine and copy said books and records and all other documents and materials in the possession of and under the control of Licensee with respect to the subject matter and terms of this Agreement.

In the event a sublicense is approved by Licensor as provided hereunder, Licensee shall also obtain for Licensor the right in any and all of such sublicenses for Licensor to similarly inspect the books and records of the sublicensees. The exercise by Licensor of any right to audit at any time or times or the acceptance by Licensor of any statement, or payment shall be without prejudice to any of Licensor's rights or remedies and shall not bar Licensor from thereafter disputing the accuracy of any payment or statement and Licensee shall remain fully liable for any balance due under this Agreement.

It is agreed that such confidential and proprietary business information shall be retained in confidence by Licensor and shall not be used by Licensor or disclosed to any third party for a period of two 2 years from the date of disclosure, or without the prior express written permission of Licensee unless required by law.

The year-end financial information must be prepared by a chartered accountant having no interest in Licensee's business and approved by Licensor. Licensee also agrees and acknowledges that for each calendar year in which this Agreement is in effect, Licensee shall be required to meet a minimum level of Net Sales of the Licensed Products in the amount of One Hundred Thousand United States Dollars.

Licensee shall submit a written list of the proposed customers to Licensor for Licensor's prior written approval, which approval may be given or withheld at Licensor's sole discretion, based upon whether it deems that the proposed customer shall enhance the quality and prestige of the Trademarks. Licensor shall have the right to withdraw any such approval on written notice to Licensee.

Licensee shall not a market or promote or seek customers for the Licensed Products outside of the Licensed Territory; b establish a branch, wholly owned by subsidiary, distribution or warehouse with inventories of Licensed Products outside of the Licensed Territory; c sell or distribute any Licensed Products to wholesalers, jobbers, diverters, catalog vendors or any other entity which does not operate retail stores exclusively; d sell the Licensed Products directly to the public in retail stores; e use the Licensed Products as giveaways, prizes or premiums, except for promotional programs which have received the prior written approval of Licensor; or f sell the Licensed Products to any third party or Affiliate of Licensee or any of its directors, officers, employees or any person having an equity participation in or any other affiliation to Licensee, without the prior written approval of Licensor.

Licensee acknowledges that Licensor is entering into this Agreement not only in consideration of the payments to be made by Licensee, but also in consideration of the promotional value to Licensor of the widespread marketing, distribution, advertising, promotion, offer for sale and sale of the Licensed Products.

Accordingly, Licensee shall use commercially reasonable efforts to seek to procure the greatest volume of sales of the Licensed Products consistent with high quality and shall diligently and continuously make and maintain timely and adequate arrangements for their manufacture, marketing, distribution, advertising, promotion, offering for sale and sale. These approval procedures shall be implemented using prescribed forms to be supplied to Licensee by Licensor and shall incorporate the basic approval requirements and steps outlined in the following sections.

Licensee agrees to retain all materials relating to approvals in its files while this Agreement remains in effect and for 3 years thereafter. If Licensor should disapprove any sample, it may provide specific reasons for such disapproval.