In ABG Filing, a Reminder of Some Licensing Basics
It was big news last week when Authentic Brands Group filed the registration statement with the SEC for its initial public offering of stock. The company has been on a high-profile buying spree, and according to the statement, its brands last year generated about $10 billion in annual Gross Merchandise Value (defined as “management’s estimate of the retail net sales of products incorporating our brands based on certain metrics reported to us by our licensees, including their retail and wholesale sales).
A few other numbers set out the parameters of the company’s business. In 2020, it reports, 83% of revenue was attributable to payments of guarantees. And, “as of March 31, 2021, future contracted minimums totaled more than $2.6 billion, of which more than $400 million is payable to us in each of 2021 and 2022, representing significant contractual recurring revenue streams from licensees.”
The document sets out the licensing proposition clearly, describing ABG’s “asset-light model [that] has generated strong operating margins and is highly capital efficient…. Our licensee partners bear the capital, manufacturing, inventory, markdowns and distribution responsibilities, and work in partnership with our team to execute the strategy and shared vision of building long-term value in the marketplace.”
Reminders in ‘Risk Factors’
There’s lots of financial information and legal minutiae in the hundreds of pages. But part of our attention was drawn to the 30-page section labelled “Risk Factors” – a necessary part of the paperwork surrounding any investment vehicle, and which includes references to general business conditions and practices that could apply to almost any enterprise – that can be read as a licensing primer of sorts, highlighting the strategic vision, business execution, and attention to detail needed to run an outbound licensing business effectively.
None is earth-shattering, but rather a reminder (from the licensor’s perspective) of the details inherent in a successful licensing venture.
For example, there’s the imperative for a brand owner to accurately vet a potential licensee, assessing its capabilities and business practices. The risk, as laid out in the registration statement: “The failure of our licensees to adequately produce, source, market and sell products incorporating our brands, continue their operations, renew their license agreements or fulfill their obligations under their license agreements, including paying GMRs and other amounts, could result in a material decline in our results of operations.”
After all, it’s noted, “although we can maintain control over our licensees’ products and content to a certain degree through the provision of marketing support, trend direction and contractual approval rights, including our right to approve products, presentation and packaging, we generally do not design or manufacture the products associated with our brands and therefore have more limited control over such products’ quality and design than a traditional product manufacturer might have.”
Then there’s the imperative to make sure everything runs smoothly. After all, the document notes, “We rely on our licensees to develop and promote our brands, and if we are unable to maintain good relationships with our licensees, our business, financial condition and results of operations could be adversely affected.”
It’s not just about any specific deal, or even any particular licensee. As the filing notes, “The viability of our licensing business depends on our ability to establish and maintain good relationships with our licensees. The value of our brands and the rapport that we maintain with our licensees are important factors for potential licensees considering doing business with us.”
Then there’s the imperative to (as has been said in other contexts) trust but verify. “While we typically have the contractual right to audit our licensee” ABG says, “we generally rely on the accuracy of our licensees’ royalty reports for reporting and collecting our licensing revenue, and if these reports are untimely or incorrect, our licensing revenue could be delayed or inaccurately reported.”
Specifically on the celebrity/entertainment side of its business, ABG is cognizant of the need to stay vigilant in another aspect of the licensing business. “Our license agreements provide our licensees with rights to our IP assets and contain provisions requiring our licensees to comply with certain standards to be monitored by us,” it notes. “Our failure to adequately monitor our licensees’ compliance with the license agreements or take to appropriate corrective action when necessary, may subject our IP to cancellation, loss of rights, or diminution in value.”