Toy licensing agreements are an excellent way for a toy brand owner to create income that capitalizes on their toy and brand. By entering a toy licensing agreement with another party, they can protect their interests while granting the distribution and marketing rights to others in order to reach new markets for the toy.

As a toy brand owner granting a license to another party, control over where and how the toy is sold are retained, and intellectual property rights are protected. However, as the “licensor”, you allow that party, known as the “licensee”, to use the logos, packaging design, graphic images and other assets associated with the toy to sell it under the licensee's corporate entity.

There are reasons why a licensor may consider licensing the rights to their toy. It could be that they do not have the experience, capabilities or funds available to capitalize on opportunities to adequately commercialize the toy. Another case could be that the toy fits nicely into a category of products already sold by the licensee and it makes sense to shoehorn the toy into their product line.

On the other hand, the reasons for a licensee interested in entering into a licensing agreement to sell a toy could include reduced R&D costs to create an already existing product, reducing competition for similar products, or to capitalize on the brand associated with the toy.

Major Points of Contention in Toy Licensing Agreements

Regardless of the reason parties enter into toy licensing agreements, there are two areas that both the licensor and licensee should be aware of:

  • The definition of what constitutes a “sale.”
  • The amount of royalty that will be paid out through the agreement.

The different goals of each party and the way these two factors result in the eventual profits of each side are understandably major points of contention of parties to an agreement. As in the case when entering into any legal agreement, it’s always wise to consult an experienced attorney to protect your rights.

How the Definitions of “Sale” Affect Profits

Generally, there are two accepted definitions of “sale” as used in accounting practices that are applied to toy licensing agreements:

  • Gross Sales: The total amount of all sales transactions without allowing for any other factors to enter into the amount earned through sales.
  • Net Sales: This amount reflects the eventual profit when factors such as sales allowances, sales discounts and sales returns are calculated into the final profits.

Understandably, the discrepancy between these two figures greatly affect the final profit margin and amount paid in royalties for each party. The licensor would like to receive royalties based on gross sales to receive the highest payout possible.

The licensee, on the other hand, is the party entering into agreements with distributors and retailers that rely on established trading terms and discounts. Licensees are interested in only paying out royalties based on the money they actually receive for each sale, after net sales factors have been applied.

Components of a Toy Licensing Agreement

Toy license agreements are actually similar to most licensing agreements that transfer intellectual property rights between parties. They typically include:

  • Length of agreement
  • Exclusivity or other terms of use
  • Restrictions on the way a product is sold or geographic markets
  • Rights to sublicense the toy to another party
  • Indemnification, liability and oversight clauses
  • Payment terms

Many toy licensing agreements include provisions for minimum royalty payment amounts to be distributed to the licensor, whether or not sales goals are reached. This is especially true when there has been tremendous enthusiasm established through the success of the brand being licensed and competition arises between licensees. In these cases, it is often the licensor who holds the upper hand.

However, enthusiasm can wane, and not every licensing opportunity is a sure thing. Therefore, it is not unusual for established licensees to apply the same accounting principles and payment practices in all licensing agreements and not deviate from these terms in order to limit risk and protect their investment.

According to the Licensing Industry Merchandiser’s Association, global retail sales of licensed merchandise totaled almost US $262 Billion in 2016. In the best-case scenario, both parties to a toy licensing agreement come out of the deal as winners. The licensor can benefit from receiving a steady stream of royalty payments without spending time, energy and funds to get their toy to market. For licensees, they can take advantage of existing relationships with distributors and retailers to quickly and efficiently take the licensed product to established markets.

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