15 Sep Key Points To Negotiating A Successful Sponsorship Agreement
When entering into any sponsorship agreement, there are several key points that sports teams and/or sports and entertainment events should consider.
Any good sponsorship agreement begins with analyzing the goals of the sponsorship. What rights will the sponsor have? Who will secure clearances and rights to music and video materials? How many advertising mentions and credits will the sponsor receive? What is the size and placement of corporate logos? Will the sponsor be indemnified against liabilities resulting from the sponsorship, including personal injury? Most sponsors realize that investing in the sponsorship of an event is only the beginning of a major commitment. Therefore, drafting an agreement with an inclusive bundle of rights will likely result in a greater identification with a single sponsor, and thus, a more effective sponsorship.
Exclusivity. Product association with an event is one of the primary reasons for sponsorships. When establishing new events such as music festivals and marathons and food events, the promoter and the sponsor may have competing interests. The promoter wants to maintain the integrity of the brand for the event whereas the sponsor wants to associate the event with their product. The parties should then consider resolving these issues in the following ways: 1) limit the sponsor’s ability to sponsor other events, competing or not, at the same time as the event; 2) limit the promoter’s ability to recruit sponsors who sell competing products (e.g., Coke & Pepsi); or 3) provide the sponsor with consecutive options to renew. When reviewing contracts, it is important to ensure that such limitations are minimal both in time and geography.
Duration of Sponsorship. If the sponsorship agreement is for a relatively long period of time, it may be appropriate to include a break clause to allow either party the opportunity to terminate the agreement without cause. Parties should consider on what grounds it should be entitled to terminate a sponsorship agreement and make sure that these are included in the sponsorship agreement. The termination clause(s) in a sponsorship agreement should be clear on what happens following termination. For instance, if the team or the sponsor has provided the other party with intellectual property such as logos, etc., it will want something in the agreement which provides that this is returned to the owner as soon as possible following termination.
As a sponsor, to guard against being replaced, the agreement should include either a sponsorship duration clause or a right-of-first-refusal before the promoter may seek a new sponsor. The duration should be long enough to protect the sponsor when the vent is strong, but short enough to prevent the sponsor from paying for a lousy event. To address this latter concern some sponsorship contracts incorporate performance criteria such as attendance or from the perspective of a sports team, based upon a club’s winning percentage.
- Options to renew: Renewal provisions can vary widely, but they usually include the ability of one or both of the parties to renew the agreement for a period of time with relatively few items to be renegotiated. Unfortunately, a pitfall to this is that these renewals do not adequately address the issues that will need to be renegotiated at the end of the term. For example, some renewal provisions will simply state that the parties may renew the agreement on the same terms and conditions as set forth in the existing agreement. If this is not adequately anticipated up front, then the renewal provision could either be almost meaningless or, at the other extreme, very onerous to one of the parties.
- Rights of First Negotiation: These provisions typically involve a requirement that the property owner negotiate in good faith with the sponsor about renewing or extending the agreement before the property owner can offer the same sponsorship rights on the open market. However, a Rights of First Negotiation is not without risk or burden. It is very important for the sports property to make sure the Rights of First Negotiation period expires far enough before the expiration of the agreement to allow the property to negotiate an current agreement with a new sponsor.
- Right of Last Match: A Right of Last Match usually gives the sponsor the right to match the terms of any deal that the sports property is able to negotiate with a competitor of the sponsor. Sometimes, this right can extend to any agreement the sports property may negotiate with any party, even non-competitors. Right of Last Match are usually considered the most restrictive to the sports property because this right often will chill the marketplace for the property’s benefits. For example, if a sports property discloses to a prospective sponsor that, once they negotiate a deal, the sports property must offer the same terms to a competitor before entering into the agreement, then the prospective sponsor likely will not want to negotiate with the sports property.
Sponsorship Fees. Calculation of sponsorship fees is another important point which parties should reach consensus on before any written agreement is entered into. For instance, is the sponsorship fee going to be a fixed amount or will it be based upon other parameters such as the value of the sponsorship to the sponsor? Will the fee increase upon certain events occurring such as a championship? Teams should also consider the timing of payment. Will a lump sum in advance be most beneficial to the team or would it prefer to receive the sponsorship fee in installments?
Of course, sponsorship is not always simply about the payment of cash. Sometimes sponsors provide prizes (e.g., Kia Motors America Inc sponsors the Los Angeles Clippers and provides a car to a lucky fan who can hit a half-court shot during halftime), carry on marketing campaigns (e.g., State Farm Insurance runs ads for the NBA and its players) or contribute products (e.g., Adidas provides shoes and apparel for the University of Kansas Men’s and Women’s Basketball team).
Indemnification and Liability Insurance. Teams should be aware that liability for death and personal injury cannot be excluded in the sponsorship agreement. They should however be encouraged to exclude liability for indirect loss or loss of profits on the party of the sponsor. The sponsorship agreement should address liability and indemnification issues; specifically that the promoter shall indemnify and hold the sponsor harmless against any and all liability arising from the sponsorship of the event. Further, the agreement should include a requirement that the promoter secure insurance for all liabilities in a specific amount, naming the sponsor as an insured. The insurance coverage should include workers compensation, commercial general liability, personal injury, commercial automobile liability, state disability, errors and omissions, cancellation of event, weather and catastrophe, television and media interruption, travel, and third-party property damage.