In the world of licensing, many well known brands licence their Brand Names to other businesses who use them to add value to their products.
Famous brand names will include top Formula One teams like Red Bull, Mercedes F1, Ferrari F1, Maclaren Mercedes and football teams like Manchester United, Chelsea, Barcelona, Real Madrid, Arsenal, Liverpool, Inter Milan, Juventus, Rangers and Celtic in Scotland
National Associations looking after sides like England, Germany, Spain, Holland, Brazil, Argentina, Japan, China, India and the controlling bodies, UEFA, FIFA etc will all licence their brand names to businesses and well known product brands
These organisations will have strict rules about using the image rights of Famous Players or Top Drivers. In the football world, these rules are designed to spread the funds around the team or squad…so all the money doesn’t go to a few top stars like Cristiano Ronaldo, Wayne Rooney, Lionel Messi, and of course David Beckham
Usually, for famous brands like these with significant commercial worth, the licensor will require the licensee to pay an ‘Advance Guarantee’
This is a fee which must be paid in advance, calculated from the licensees best estimate of royalties that can be earned by the licensor during an agreed period, say two years
The licensee must pay that sum in advance regardless of how good their estimate turns out to be…if the licensee achieves the forcast number of sales or more, everyone is happy, however if the product fails to sell in the forcast volumes, then the fee has been paid and is non refundable
There is minimal risk to the brand owner who protects his brand by undertaking due diligence to ensure his brand is not going to be damaged by association with the licensee, so if the funds are available, it’s relatively straightforward for the applicant to put this kind of agreement in place.
The Advance Guarantee can become a significant revenue stream which can lead to a proliferation of similar licenses
Unfortunately, the Advance Guarantee is another barrier small companies have to hurdle on their way up the pecking order. The last thing they can afford are big advance payments which will damage cashflow!
Of course the brand owner will argue that they had to overcome this kind of challenge on their way up. After all, it’s a dog-eat-dog world!
So if you want to associate your product or business with Mercedes F1 and Michael Schumacher, or Manchester United and Wayne Rooney, or even be a big partner at the World Cup in South Africa…be prepared to make a big Advance Guarantee payment and then significant ongoing Royalty Payments