Hidden Dangers in Private Equity Brand Ownership

One of the more remarkable developments has been the rise of private equity ownership of brands. By pooling investor monies into unregulated and semi-regulated networks, PE companies have turned out to be important players in most areas of the economy. This is true for brand ownership, especially with CPG (Consumer Package Goods) houses shedding brands that don't "fit" with their portfolio, or grabbing up companies in receivership. Increasingly, licensing agents find themselves working on brands that are owned by companies heavily-leveraged or owned outright by PE money guys.

There's an old saw in baseball that eventually, the manager of any team will get fired. This is equally true for licensing agents, who often are pushed out by companies who decide they can manage their licensing programs themselves, or who simply decide that licensing is no longer a viable or strategic component for them. So up until recently, "post-term compensation" was the hot-button topic for agents. The concept concerns how long an agent will continue to receive all or part of their fees after their contract with the licensor or brand has ended. Some contracts go into perpetuity, but most companies insist on a "sunset" provision. Agents and brands continue to arm wrestle over the length of post-term compensation.

More troubling is the problem of private equity ownership of companies and/or brands. Oh, I have nothing against the PE money guys, they're all very smart and have saved or resurrected dead brands. They have cash to spend, and few hide-bound reservations about "degrading" the brands or companies they've acquired. Because PE funds need to show growth and profits quickly, PE managers want results, and understand often better than restaurant execs or brand managers how licensing can help generate both fast traction and raise the overall value of the brand or company.

But because of that relentless pressure to make money, PE guys are thinking about selling a brand or company the moment they buy it. The question isn't IF they will sell, but WHEN. The current economy has slowed this process quite a bit, but money guys typically are looking to recover their investment within a few years.

Now how would that affect a licensing agent?

Simple: you work for company A licensing their brand. You put in place a nice deal or two that raise the overall value of the brand or company. The property is sold, sometimes to another manufacturer, or perhaps a different PE group. The deals you've put in place may or may not survive the transfer. Suppose a competitor is buying the company and plans to quietly allow its brand(s) to die? Or the new company isn't interested in having you continue as the brand's agent?

PE guys like their transactions to be "clean." This means no encumbrances on the transfer that could hold up the deal or cost them points. But if you don't get protected, your chances of being screwed rise dramatically. The answer? A transfer fee that brings you something for the effort you've put into building up the brand.

Naturally, licensors and PE funds HATE any kind of transfer fee, and you'll have to argue hard to get one into your representation agreements. But if more licensing agents become aware of this issue, the chances of getting transfer fees into most contracts will help us all.

Excerpted from BSLG's weekly subscription news reader service Food Business News. To subscribe or for information about licensing, contact Broad Street Licensing Group (tel. 973-655-0598)