Toy Licensing – The Basics
One of the queries I get asked most is how the Licensing process works for Toy and Board Games products.
So rather than explain the same thing over and over, decided to post this here as an easy reference tool.
This is for people who want to understand how the process works, it’s the real basics. It isn’t going to give you more the more advanced stuff, maybe I’ll do another post on that some time!
What is Toy Licensing – basically, this is where the owner of a Brand or Brands wants to generate 3rd party income from their Brands. They might not have the capability or interest in commercialising their Brands in every category, and might choose to ‘License’ the rights to particular product categories to companies focused on those products. These companies can then use the imagery, logos and other assets owned by the Brand holder.
Licensee & Licensor – The Brand owner, the one who is Licensing their rights out is the Licensor. The company who will commercialise the product is the Licensee.
Commercial Terms – The Licensor gets paid via royalties paid on the Licensee’s sales, royalty rates would typically be c. 8-12% of Licensee’s net sales. The Licensee would normally be required to commit to an M.G. (minimum guarantee), which is a minimum amount they will pay the Licensor for the rights, regardless of whether they sell anything or not. The M.G. is normally split into an initial ‘Advance’, and subsequent installments over the period of the term of the license. The Licensee does not pay any additional royalties until they’ve sold enough to cover the M.G.
Contractual considerations – Clearly I am not a Lawyer, so always seek qualified legal advice, but some points which I have found to be important are: The definition of what counts as ‘Sales’ can make a big difference to how much royalty needs to be paid. It’s in the Licensee’s interests to define ‘Sales’ in such a way as to reduce the total sales value so that less royalties are owed, clearly the Licensor has the opposite interest. This is usually a point which leads to some ‘skirmishes’ in the contractual negotiations. In particular, I would suggest that Licensees should never accept royalties based on ‘gross sales’, only on net sales i.e. money they actually receive. The difference between Gross and Net is often due to retailer trading terms and discounts, which while often negotiable are an inescapable fact of doing business.
Term – most Toy Licensing or Board Games Licensing agreements are for 3 years. Because we have an annual sales cycle, three years is effectively 3 selling opportunities, anything less is perceived to not offer enough opportunity to recoup the M.G. and development expenses.
Royalty reporting – royalties are normally reported on a quarterly basis, with most contracts stipulating between 30-60 days from quarter end as the reporting and payment deadline. If you are a Licensee, 60 days gives you more time to collect cash from customers/ensure reported sales are not bad debts, if you are a Licensor, clearly 30 days gives you quicker cash!
Competing for Licenses – it’s normal to compete for Hot Toy Licenses. If the Brand you are trying to license is a clear driver of merchandise, the Licensor will be very likely to solicit interest from several competing companies in order to try to get an auction process going, which normally delivers better deal terms for them. There are ways and means to get ahead in an auction process – we once bid less than half of a major rival on a License which was critical to us…don’t have space to explain how we won that here, but check below for more details on a report which covers this!
Style Guides/Approvals – most Brands will deliver some type of style guide or Brand guidelines on how to use their Branding, imagery etc. Some won’t. So the development and product approval process normally goes one of two opposite ways: a). A very structured micro restricted approach, where the Licensor will give very specific guidelines/mandatories. b). No guidance at all, often leading to constant failure to approve, wasted R&D expenses and sometimes missed ipportunity/backlash. Neither of these is easy to handle, so my message is – don’t presume the work is done once you’ve won the License!
Getting in touch with Licensors – often Licensors will make themselves very available, as they selling rights. Most established Licensors will be at the Licensing Expo in Las Vegas in June, or at Brand Licensing Europe in October.
That’s the basics for those who want to know how it works.
For anyone wanting more advanced information, as well as some powerful Tools, Tactics and Tips on how to Win the hottest Licenses, check out my published report: http://www.stevenreece.com/shop/
If you have any comments, or questions on this topic – please feel free to email me: firstname.lastname@example.org (I’m not responding to comments left on the Blog due to excessive Spam comments, so get in touch via email if you want).
All the best