How Licensing Teams Can Adapt to Tariff-Driven Royalty Challenges
In response to tariffs, many licensees are being forced to increase their prices to cover the inflated cost of goods. In turn, these higher sales prices could increase their royalty payments exponentially. This ripple effect is untenable in the short term for licensees and will significantly erode licensor opportunities in the long term. How can licensees and licensors find an equitable way to adjust to the compounded effects of tariffs on royalties? And further, how can they effectively manage the constant state of flux? Licensing International’s attorneys and industry experts shared potential solutions for brand owners, manufacturers, and retailers in their April 2025 webinar, Addressing the Impact of Tariffs. In this article, FADEL recaps the various contract strategies presented in the webinar and proposes solutions to put them into action.
Why Tariffs Demand Compromise
Licensees are caught between a rock and a hard place. Raising prices to cover the entire tariff will undoubtedly tank sales, yet their margins aren’t nearly high enough to absorb the price increase on imported products on their own. Raising prices is therefore inevitable, however that means that the royalty rate they initially negotiated applies to an artificially higher sales price.
The symbiotic relationship between licensees and licensors is critical to the success of both sides. And while licensors may stand to reap windfall gains due to inflated pricing caused by tariffs, that isn’t a payment structure that licensees will be able to maintain for long. While many licensees may still carry pre-tariff inventory, weathering this storm will require negotiation and the flexibility to adapt to continual changes. Having software in place to capture and react to those changes will allow licensees to refocus on creating and selling—which benefits both sides.
6 Strategies to Tariff-Proof Licensing
1. Lower the royalty rate temporarily.
Agreeing to a lower royalty rate releases licensees from the immediate burden of carrying the cost of inflated payments. Lower rates can take effect immediately and be reviewed at agreed-upon intervals.
“Legal teams should reexamine existing contracts for clauses that may be impacted by tariffs—such as royalty adjustments, exclusivity terms, and termination triggers,” advises Alexander Georges of McDonnell Boehnen Hulbert & Berghoff LLP. “Renegotiation may be necessary to preserve the intended economic value.”
2. Adjust royalty rates by territory.
China is a main source for the import of licensee products. The toy industry, for example, sources nearly 80% of toys sold in the US from China. For some licensees, 90% or more of their products are imported from China. Currently, the 145% tariff on China is the exception to Donald Trump’s 90-day pause, leaving licensees with a staggering increase on their imports.
This strategy allows licensees and licensors to review which countries licensees rely on most for imports and arrive at a tariff adjustment that is limited to territories that represent the highest pain points for licensees.
3. Apply a tiered approach.
This strategy offers a sustainable solution by automatically adapting royalty rates as tariffs change in each territory. For example,
Licensing International’s industry experts suggested this royalty structure may become an industry standard going forward. However, without advanced royalty accounting and reporting tools, constantly changing rates could introduce a massive administrative burden, potentially negating the benefits of the strategy.
4. Change the definition of net sales.
By eliminating expenses such as freight, duties, and tariffs from the sum a royalty rate is applied to, royalties are purely based on the sale of the goods themselves. This is a sustainable solution that provides licensors with steady royalties that they can forecast against while giving licensees peace of mind that they won’t be on the hook for fees that are beyond their control.
“A licensee can propose to a licensor that they will continue to make sure they get the same royalty they got before the tariffs, but ask for relief and deduct the tariff from the wholesale price so that the increased royalty doesn’t get passed on to the consumer,” suggests Gregory Pan, Partner at Nolan Heimann LLP.
5. Revisit minimum guarantees.
As we elaborated on in our previous blog, How to Navigate Licensing Amid Tariff Uncertainty, many licensed consumer goods fall under the umbrella of discretionary spending. As American consumer confidence continues to fall, licensees are likely to face difficulties in moving the volume of goods they had originally anticipated. If they fall short, they are on the hook for paying royalties on unsold merchandise.
Giving licensees a temporary bye on guaranteed minimum royalties and guaranteed minimum sales could be the difference between sinking or swimming in our present economic situation. By reducing, waiving, or adding time to guaranteed minimum payments, licensors focus on their long-term relationships rather than short-term gains.
“Brand owners do have some protection based on provisions for minimum guaranteed royalties, but the successful licensing programmes are not about collecting guaranteed minimum royalties,” explained Steven Heller, president and founder of The Brand Liaison. “Most brand owners are looking for revenue streams significantly above the minimums. Plus, if the licensee doesn’t stay in business or doesn’t renew the licences, the brand owner won’t even have those minimums at all.”
6. Adjust contract terms.
Extending sales terms, territories, or channels expands opportunities for licensees, thereby giving them a possibility to recoup the cost of higher royalties with increased sales volume. This may be a viable strategy for established licensees, as it could open up new markets with substantial growth potential. Smaller licensees, however, are unlikely to be able to shoulder the increased inventory and marketing costs that a broader footprint would entail.
Note that any of these strategies will require written amendments to contracts. It is important that the agreed-upon terms remain clear, transparent, and easily accessible to all parties.
Manage Additional Royalty Complexities with FADEL
Each of the above strategies comes with adjustments to contract terms along with the ripple effect those changes have on accounting and royalty reporting. FADEL’s solutions have the flexibility to manage fluctuating terms and added complexities, taking administrative burden and risk of errors out of the equation. IPM Suite for enterprise licensees and licensors and LicenSee for small-to-midmarket licensees come complete with forward-thinking features to navigate change.
- Set royalty rates by country. If negotiations result in an agreement to adjust royalty rates by territory, they can easily be changed in FADEL’s software to properly calculate and report on renegotiated royalties.
- Add conditions based on tariff percentage. FADEL accommodates tiered rates just as easily as flat rates by allowing conditions to be placed by tariff percentage. For example, if a tariff rate increases to above 50%, our software automatically adjusts the royalty calculation and reporting according to the amended terms. Royalty reporting provides a clear paper trail of changes.
- Assign attributes for advanced calculations. Using dynamic formula builders, FADEL’s licensing solutions can be configured to base royalty calculations on agreed-up terms. For example, attributes can be assigned to subtract freight and duties from gross sales, then apply the royalty rate to the net.
- Track and manage deals. The FADEL Deal Management module supports contract negotiations, capturing even the most complex agreement terms. It provides a centralized hub with customizable deal templates, coordination, addendums, and tracking, plus deal history provides a complete audit trail. Amendments can be added at any point in time and the royalty rates and corresponding calculations are updated accordingly.
- Anticipate new scenarios with predictive modeling. With the US tariff policy in a constant state of flux, the “what-ifs” can seem insurmountable. FADEL’s AI-powered analytics allow licensees and licensors to run what-if scenarios, providing a solid foundation for negotiations.
Don’t wait until it’s too late—request a demo today to get ahead of tariffs. Plus, register for our upcoming webinar, Tariffs, Royalties & Complexity: How to Future-Proof Licensing Deals.
Simplify Licensing Agreements and Maximize Revenue With FADEL
FADEL plays a critical behind-the-scenes role in helping major brands manage licensing agreements with greater efficiency, accuracy, and profitability.
With over 20 years of expertise, FADEL specializes in automating the complex processes of rights management, royalty tracking, and brand compliance.
From verifying that licensed content is used only within approved territories to calculating royalties down to the last cent, FADEL’s cloud-based solutions provide the infrastructure that keeps global licensing operations running smoothly.
Our solutions include:
- Brand Vision: A brand protection solution that helps ensure compliance with licensing agreements by providing clear visibility into rights, talent, and usage terms. It safeguards brand integrity while streamlining marketing and product development workflows.
- IPM Suite (Intellectual Property Management): An end-to-end IP management software for managing rights, royalties, and licensing agreements across complex ecosystems. It enables brands, licensors, and licensees to automate workflows, ensure compliance, and maximize the value of their intellectual property.
- LicenSee: A royalty management software designed to help licensees manage licensed products with improved accuracy, transparency, and compliance. It streamlines royalty reporting, monitors usage rights, and ensures alignment with agreement terms.
- PictureDesk: A media asset management software that oversees image licensing, rights, and usage across the organization to ensure consistent and compliant visual asset deployment.
- AI-Powered Business Insights & Content Tracking: Streamline licensing, royalties, and content compliance with AI and automation.
Trusted across industries, FADEL enables brands to minimize risk, ensure legal compliance, and maximize the value of their intellectual property.