Bo's bLAWg - “Flat Fee” and “Royalty” Licensing Fees
MJ Bogatin (“Bo”) of Bogatin, Corman & Gold, is an Arts and
Entertainment Attorney in San Francisco. He is also Co-President of
California Lawyers for the Arts. www.calawyersforthearts.org Bo is available to answer some of your questions surrounding the business of Art Licensing. - THANKS BO!
A Reader asks: What is “flat fee licensing” (for graphic design work or commissions)?
I want to use your question to compare and contrast the two common kinds of licensing fees: Royalties and Flat Fees. So, hypothetically, let’s assume you have been offered a License that lets you choose between a Royalty and a Flat Fee. Which are you going to accept? You need to have a good understanding of both, and the surrounding circumstances, to make the best choice for yourself.
“Royalties” are the compensation paid for the Artist illustration use rights based upon the Licensee’s sales of the product on which the licensed illustration is used. The percentage rate is usually 5-10% of the merchandizer’s gross (or an appropriately-limited “adjusted gross”**). When considering a Royalty-based License offer, there are a number of factors to weigh.
First, what kind of sales might you expect of products with your design under the License?This initial question raises a bunch of others: Are there many different products on which your illustration will appear, or just one? Do purchasers of the Licensee’s product have a wide choice of imagery to choose from, or just yours? Does this manufacturer have lots of competitors with a wide range of competing imagery, or is the product reasonably unique? Does the Licensee have a dynamic website and generate a large number of retail sales directly, or is it by and large (or entirely) a wholesaler that uses distributors? If this manufacturer relies on its distributor to generate sales, do its goods (I mean Your goods) get distributed to the largest national chains, Walmart, Costco, Target and/or Sears? (Greater volume sales at a lower Royalty are better than minimal sales at a higher Royalty rate. Do the math!)
How much of the Licensee’s sales are generated through Amazon and subject to a larger discount on wholesale prices than might otherwise be the case? What is the quality of this manufacturer’s goods? Are they well-regarded in the marketplace? When looking at this merchandizer’s quality and price-lines, how do they compare with those of other manufacturers? (Are consumers more likely to pay something more for your Licensee’s goods because of the goodwill associated in the brand, or if not, is the price point remarkably less than a better-known brand, but likely to generate a much larger volume of sales due to the lower price?)
I can think of a bunch more such questions, but these are the main ones; the ones you want to do your best to assess to determine whether a Royalty is the best way for you to go on this license, or whether a Flat Rate might be a better prospect.
** “Adjusted Gross” is Gross minus sales tax and delivery costs as applicable instead of the Licensee’s Net proceeds. Why Gross or Adjusted Gross instead of a high Net percentage? Because you never know what the Licensee is going to actually spend on production, marketing and distribution. Terrible business decisions could be made by the Licensee that make the entire undertaking unprofitable. This need not deprive the Artist of her right to Royalties.
Of course, if possible, you also want to obtain an Advance on the Royalties you are to earn. An “Advance” is a pre-payment (made at the time the License is signed) on the Royalties you will be entitled to once the Licensee begins receiving income on sales of products with your imagery. The amount of the Advance is “recoupable” by the Licensee from the first Royalties you would otherwise be paid. Even a small Advance is better than none. Being out-of-pocket on the front end for rights serves as incentive for the Licensee to move forward on the product manufacture so that they can recoup what they have paid out in Advances. It gives you something for your rights even if for any reason the Licensee decides not to move forward with the product use.
Before I get to Flat Fees, two negotiation strategies to offer on Advances: 1) If a Licensee is unable or unwilling to offer a reasonable Advance on Royalties, use that unwillingness to leverage a higher starting Royalty rate; and/or 2) Obtain Stepped-Up Royalty rates. Find out as possible what the Licensee thinks would be a successful level of sales, and look to obtain an increased Royalty rate for all sales in excess of that reasonable expectation. If product sales ‘take off,’ both parties will benefit. If they do not, the increased Royalty rate will never have triggered and the Licensee will not have paid anything for the additional consideration to you.
The alternative approach for Artist compensation is a Flat Fee. A “Flat Fee” is just what it sounds like: A single fee paid for the Licensed rights regardless of sales. I remember a call from a prospective client who asked if they could get out of a License that provided for a single Flat Fee for a calendar cover image. It turns out that image was the best-selling calendar ever sold by that large publisher. The $1,500 Flat Fee looked good at the time that the time the deal was made. However, compared with 5% of the $5 adjusted gross received by that publisher on 500,000 calendar sales, ($125,000 in Royalties), it was a lousy deal for the Artist! Of course, if only 5000 calendars had been sold, the $1,500 was better than the 5% royalty.
If the License is for a term of years and a Flat Fee offered does not meet your minimum expectations, raise the prospect that a larger overall amount be paid in installments: An Annual Flat Fee for rights. On occasions when I have obtained Annual Flat Fees through the License Term, the manufacturer Rep has made the reasonable argument that the Annual Fee should reduce after the first few years as product sales decrease. This refers to what is known in business as the Product Life Cycle. Historically, new product sales numbers will rise for the first couple years, then will usually fall off as the product become ‘old’ and there are new versions and increased competition. (A good graphic image and further explanation of this can be found at this link: http://www.tutor2u.net/business/reference/product-life-cycle )
So, going back to our hypothetical choice of Royalty or Flat Fee, how do you know which deal to take? By finding out what the projected sales are going to be and what the Licensee’s gross receipts are expected to be. Just ask! These are reasonable considerations that the prospective Licensee should answer if they want your Rights! But also do your own market research as best you can. There is a more sales data available online than there has ever been before. Consider asking other Licensor Illustrators what kind of sales there have been on their similar product licenses. Make an “informed decision” on what kind of deal is in your best interest. Do not feel compelled to take the first offer without doing this ‘due diligence!’ If despite your best efforts, you are uncertain, I suggest that you look to keep the Term shorter than you might otherwise do. That way, if you are unhappy with the choice, as the end of the Term approaches, you may be in a position to extend the Term on alternative Royalty rates more beneficial to you.
As for the situation where you have been asked to create new graphics or “commissions” for prospective licensing purposes, I recommend that there be a minimum ”service fee” for the preparation of such new imagery. The fee can be on a ‘per image’ basis or hourly. All or part of this fee can be attributed as an Advance, and recoupable by the Licensee from your future Royalties. That’s an appropriate issue for negotiation. If you are going to incur significant costs in conjunction with the graphics or commission, by all means, look for a right to recoup such costs from the Licensee. This is the very least they should pay unless you are guaranteed some minimum for the work involved in preparing imagery for prospective licensing that may not be selected for product use or generate meaningful sales.
Finally, do not fail to make sure that you have Reversion Rights. Whether there is a set Term that will expire sooner or later and revert rights, or if you have minimum thresholds that must be met for the Licensee to continue to maintain exclusive or non-exclusive rights, you want every License to have an ‘expiration date.’ Get your rights back, and perhaps you can find a better deal with a more successful – and ultimately profitable – Licensee.
Have a legal question? email it to info@AnnGraphics.com.
I will forward it to Bo. It might be a blog post! You can search "Bo's
bLAWg" to read more posts. I am looking forward to your comments and
thanks for sharing this great information on social media.
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