🪙 IP Business Financial Terms Brand Partners Need to Know
When proceeding with IP collaboration agreements, terms such as royalty, minimum guarantee, and running royalty come up.
If a brand partner does not accurately understand these terms, they may end up having to pay a much higher amount than expected after signing the contract.
Conversely, properly understanding the meaning of each item helps you manage the initial cost burden or negotiate favorable terms to fit your sales plan.
So, in this episode, I have summarized five financial terms that brand partners absolutely need to know in IP agreements.
Royalty is the amount paid by a brand partner to an IP holder in exchange for the right to use the character.
It is usually determined as a certain percentage based on the product sales amount (sales quantity × retail price) or production amount (production quantity × retail price).
Sometimes, the price is set at the supply price rather than the consumer price.
There is no fixed standard for royalty rates because they vary depending on factors such as character recognition, the type of collaborative product, and exclusivity.
Therefore, from a brand partner's perspective, it is important to first calculate projected sales volume and margin structure, and then determine the range of royalty rates that are manageable.
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Please make sure to check whether the royalty standard is based on sales volume or production volume.
If based on production quantity, you may have to pay royalties for the quantity produced even if the product does not sell.
The Minimum Guarantee (MG) is the minimum guaranteed amount that the Brand Partner promises to pay to the IP Holder during the contract period.
Regardless of how many products were actually sold, you must pay the amount stipulated in the contract no matter what.
For example, even if the minimum guarantee is 5 million won but the royalties from actual sales are only 3 million won, the brand partner must pay 5 million won.
From a brand partner's perspective, the minimum guarantee is a fixed cost that is incurred regardless of sales results.
When deciding on a collaboration, you need to carefully assess whether the minimum guarantee amount is sufficient to be recovered through actual projected sales.
Especially in the case of exclusive contracts, IP holders tend to demand high minimum guarantees, so it is important to carefully balance the scope of exclusivity and the minimum guarantee.
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MG is a negotiable item.
If the amount proposed by the IP holder is burdensome, you can attempt to negotiate based on projected sales volume, marketing plans, and the contract period.
Running royalty is the additional royalty generated when the actual royalty amount exceeds the minimum guarantee.
A fixed amount is paid up to the minimum guarantee, but if sales exceed that amount, the difference is additionally paid to the IP holder. For example, if the minimum guarantee is 5 million won but the actual royalty is 8 million won, the excess 3 million won must be paid additionally as a running royalty.
An advance payment is money paid to the IP holder in advance at the time the contract is signed.
Subsequently, if royalties are generated from sales, the advance payment is deducted, and the remainder is settled.
For example, if the advance payment is 2 million won and the royalty is 6 million won, the brand partner only needs to pay the difference of 4 million won.
Advance payments are often structured to provide a portion of the minimum guarantee early in the contract.
From the brand partner's perspective, while there are initial costs involved, there is the advantage of building trust with the IP holder and being able to start the contract stably.
What is the difference between a Minimum Guarantee (MG) and an advance payment?
In IP business contracts, the terms "minimum guarantee" and "advance payment" often appear together.
Although both appear to be amounts paid at the beginning of the contract, they actually have different meanings and roles.
Minimum Guarantee: The minimum royalty amount that a brand partner must guarantee to the IP holder.
Advance Payment: An amount paid by the Brand Partner to the IP Holder in advance at the time of contract signing and subsequently deducted from royalties.
In practice, there are also structures where the advance payment is made as part of the minimum guarantee.
If the minimum guarantee is 5 million won and the advance payment is 2 million won, this is a case where 2 million won is paid first at the beginning of the contract and royalties are settled as sales proceed.
It offers significant advantages in that it allows IP holders to secure minimum profits and brand partners to distribute the burden of initial costs.
The settlement cycle determines how often the brand partner pays royalties to the IP holder.
You can set it to once a month, once every three months, once every six months, etc.
Since a longer settlement cycle results in a larger lump-sum payment, it is important for brand partners to negotiate an appropriate cycle considering cash flow.
In addition, the obligation to submit sales reports is often specified in the contract along with the settlement cycle.
Brand partners must report sales status to the IP holder on a fixed schedule and pay royalties accordingly.
terminology | Summary in one line |
|---|---|
Royalty | Compensation for character usage rights paid to the IP holder |
Minimum Guarantee (MG) | The minimum guaranteed amount provided by the brand partner to the IP holder regardless of sales performance |
Running Royalty (RR) | Additional royalties generated when royalty revenue exceeds the minimum guarantee |
Advance payment | Amount paid in advance upon signing the contract Subsequent settlement by deduction from royalties |
Settlement period | Royalty payment cycle(Monthly, Quarterly, Semi-annually) Must be specified along with the obligation to submit sales reports |
Understanding how royalties, minimum guarantees, running royalties, and advance payments are connected allows you to approach character collaboration contracts much more strategically.
From a brand partner's perspective, financial terms are not simply a matter of cost, but rather a matter of how well the risks of collaboration are managed.
Before signing the contract, carefully review each financial clause based on the terms we covered today.
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