Merchandise license agreement negotiations typically focus on the royalty rate that the licensee is willing to pay for the license. However, in many cases, the royalty base (i.e., the number against which the rate will be applied) is of greater importance than the royalty rate.

The royalty base for most merchandise licenses is “Net Sales.” The starting point for determining Net Sales is usually the gross invoice price. Beyond this, the licensor and the licensee may differ as to what deductions should or should not be allowed to arrive at Net Sales. Points of discussion may include the following:

In summary, in a typical merchandise license, the royalty base is at least as important as the royalty rate, and licensors and licensees should devote attention to both issues when negotiating a deal.