Tales Of A Fourth Generation Textile Executive: Fabric Licensing
Lately I have been approached by a variety of people about licensing for fabrics so I thought this would be a great time to discuss and explain fabric licensing to you. This is one of the few times that I could say that my law degree paid off as I am in charge of all the licensing contracts for our companies. In my mind there are two types of licenses: 1. Big time chain store types of licenses like Frozen, Sponge Bob, Dora, Angry Birds, NFL, NBA, NHL, MLB, etc. 2. Quilt Shop types like Pepper Cory, Jodi Barrows of Square In A Square, Buggy Barn, Kim Diehl, etc
When I first joined the family business, my main role was with A.E. Nathan, one of our divisions that sells mainly to the chains. At that time, I had the opportunity to work on a lot of the chain type licenses and the related contracts. We had Sponge Bob, Dora, Smurfs, Looney Tunes, Cabbage Patch Kids, Land Of Milk & Honey, Suzy’s Zoo, Pez and Wow Wow Wubbzy to name a few. Unfortunately, we have no big licenses now, but could sure use some.
The biggest part of the licensing process is the contract and its terms. These are some of the key terms and issues that need to be negotiated. With respect to the big name chain type licenses, the royalty rate, advance and guarantees are usually the biggest issues. Basically, these are the money issues. As far as the royalty rate goes, these chain type licenses could require a rate anywhere from 3% to nearly 20% for the really good ones. I would have to imagine that Frozen and many of the major professional sports are near the high point. So that means the licensor (owner of the license) gets a percent of every yard sold.
So for example if Frozen cotton fabric sells for $3 a yard to a chain, 20% or 60 cents per yard goes to the licensor and the licensee (fabric company) gets the other $2.40. It is extremely advantageous to have the top licenses as they are highly profitable. Not only that, but the chains need to have the hottest licenses so they have no choice but to pay for it especially because there is nowhere else to get it and all the other chains are going to have it. On the other hand, the quilt shop type licenses are more in the 3% to 6% royalty rate. Please note that quilt shops can also buy the chain store type licensed fabrics despite the way I categorized the 2 types of licenses. That being said, the chain stores cannot always buy the quilt shop licenses as many of those licenses are for quilt shops only.
The next major negotiated term is the advance. This is essentially the buy in price to attain the license for the term of the contract. For a license like Frozen, the advance could be in the tens of thousands of dollars. This is a non-refundable advance and therefore if the fabric company does not come to market with fabric for said license, the fabric company loses the money. So there is a big incentive to bring the fabric to market, to say the least. That being said, there are rare times when no chain will purchase the license and the fabric company is in deep trouble.
Assuming the fabric is brought to market, the first royalties are used to reduce the advance until the advance is zero. Thereafter, the fabric company needs to pay out the royalties. In other words, using Frozen, if the advance is $50,000, the first $50,000 in royalties do not need to be paid out because the licensor has the first $50,000 already in the bank. After that, the fabric company has to pay licensor regular royalties on a quarterly basis. With quilt shop licenses, advances are rarely used. For me, the biggest problem with paying advances on quilt shop lines is that it takes so long to bring the fabric to market that the advance doesn’t make sense. For example, if I sign a new license today, it may not be before the end of 2015 or later until I see a return on my investment. Therefore, if the licensor is my partner, they should have to wait it out like we do. Patience is a virtue! Alternatively, if the licensor is under a financial hardship, I can be more flexible as I am not an unreasonable person.
Last, but not least is the guarantee and that is just what it sounds like. The fabric company guarantees to the licensor that no matter what happens, licensor will get to keep the agreed upon royalty guarantee. With quilt shop licenses, there is rarely a guarantee. I have never seen one.
There you have it, a brief synopsis of the critical aspects of contract licensing. In addition to those issues discussed above, here are some other important aspects:
1. Term of the contract i.e. How long it will last. What it entails to re-sign and continue the contract after the term is up.
2. Legal matters like what happens if the contract is breached or what if there is a copyright infringement.
3. Packaging details i.e. what the selvedge and packaging say.
4. Advertising and marketing parameters.
5. The design approval process.
6. How much free fabric licensor gets (sample yardage) and how they could buy more fabric if they want
That sums it up. Hope you found this blog to be informative and interesting. If you know anyone that is interested in licensing for fabric, please have them contact me as we are always looking. Thanks! Let me know if you have questions and of course I always welcome comments
Happy Holidays!
Licensing Scott