Today, most businesses prefer not to guarantee results in a contract — let alone guarantee sales results. This is what truly differentiates licensing agreements from other marketing initiatives and contracts.
How to calculate Guaranteed Minimum Royalties (GMRs).
The industry standard Guaranteed Minimum Royalty is 50% of the projected sales for a given period.
For example, if the royalty rate is 5% and the licensee is projecting $2 MM in sales. The GMR would be $50,000.
$2,000,000 * 5% = $100,000
50% of the projected royalty of $100,000 = $50,000
The licensee would have to sell $1M at minimum to cover the GMR payment of $50,000.
What if sales are more than enough to cover the GMR? This is a great problem to have! The golden rule of royalty accounting is that the licensee pays the higher of the two. So the licensor would get paid all royalties earned not just the GMR.
For example, if the licensee had $3 MM in sales, the earned royalty would be $150,000 and the licensee would owe $150,000 not $50,000.
What if sales aren’t enough to cover the GMR?
This is not an ideal scenario, obviously, but sometimes happens. Even if the licensee did not sell enough to cover the GMR, they still owe the GMR to the licensor.
For example, if the licensee sold $800,000 the earned royalty would be $40,000. If the GMR is $50,000 the licensee would owe the $50,000.
Are they really guaranteed? GMRs are a contractual obligation that should be paid, even if there are zero sales. However, there are no guarantees.. If a licensee goes bankrupt, the licensor likely will not get paid. If a licensee is having trouble, they should speak with the Licensor about the possibility of adjusting the contract and GMR obligations.
Are GMRs necessary for license agreements? Yes, GMRs serve a valuable purpose. While there are other ways to address commitment and contractual obligations within an agreement if GMRs are not included, I advocate for GMRs for two reasons:
- It’s best for the Licensor to ensure that licensees have some “skin in the game” and are committed to making the licensed product a success. Brand owners don’t want a licensee using their brand to launch new products without being fully committed to making the partnership a success. GMRs show a licensee’s commitment to the licensed partnership and they also show that the licensee has the financial resources to launch and maintain the product.
- GMRs also help to ensure that licensees can’t “hold” categories to block competitors out of the marketplace. For example, you wouldn’t want a licensee to hold the exclusive licensing rights to Papa John’s frozen pizza and only continue to sell DiGiorno frozen pizzas.
If you are a licensee, don’t let GMRs scare you into backing out of a deal. If you have a solid plan, a good licensing partner and a great new product, GMRs will just be a number on your royalty report. If you are a brand owner, don’t let GMRs be the only reason you are signing a licensing deal. Help your licensee succeed and the will truly be the minimum royalty you receive.