The way a sponsorship agreement is structured can significantly impact the value of the sponsor-property contractual relationship.
Deal structure refers to the various levers that are set in the acquisition and negotiation of a sponsorship by the sponsor. These levers include:
- Base rights fee
- Variable compensation
- Asset package
- Escalator
- Term
These five levers are not equally weighted in importance. Base rights fee and asset package are the elements of the deal structure that tend to get the most focus in a value proposition. Those are the obvious value drivers – what the sponsoring brand gets for what it spends.
Variable compensation is trending, but it’s not yet the norm. The annual escalator on base rights fee is where a ballooning of cost can hide. Term can add leverage, help manage spend efficiency, and block sponsor industry competitors.
Base Rights Fee
Base rights fee simply refers to the cash and in-kind fee paid to a property by a sponsor for a set of rights and entitlements.
Base rights fee is determined by several factors: a comprehensive valuation of the rights and entitlements being provided, the competitiveness of the sponsor category for the property, the interest in the sponsor in paying at, below, or above the valuation depending on the strategic (or tactical) importance of the property.
Variable Compensation
Variable compensation, a tenet of Lumency sponsorship agreements, allows brands to manage downside risk and ensure fair value is delivered through the term of a sponsorship agreement. Without variable compensation brands must wait until an agreement goes into renewal sequence to reset the value proposition if the property is underdelivering.
A Lumency best practice is to align on a conservative base rights fee and then reward properties via incremental compensation as key thresholds are met (i.e., around turnstile/attendance, broadcast audience, digital/social metrics, other relevant KPIs). This is particularly important in cases where a property’s performance is volatile. For example, for a professional sports team when the on-field/on-court performance of the team has a significant impact on turnstile and broadcast audience.
The introduction of variable compensation to protect a brand’s investment can also be helpful in cases where properties are in a growth phase. They can justify their value to sponsors as it appreciates over the course of the term. Variable compensation creates a fair playing field for both sides of the agreement, protecting against downside risk for the sponsor while rewarding property performance.
Asset Package
Asset packages should be customized to the sponsoring brand’s objectives.
Whether from a proposal for a new property you’re considering, or a proposal for a renewal, sponsoring brands should ask to see all of the assets available, not just the ones that the property thinks you need based on your industry category. Share your objectives with the property and challenge them to create new assets that they may not already have in their asset inventory.
As a sponsoring brand, you should be anchoring to asset class weight within your sponsorship portfolio (i.e., percentage of property value coming from hospitality assets, percentage of property value coming from digital assets, other asset buckets), with variations by type of property.
Through a property valuation exercise, each asset is valued, including intangible assets. As puts-and-takes happen through the negotiation, the impact on overall property value will be better understood.
To add flexibility into sponsorship investments, value banks for particular asset classes are better than specific defined assets within those asset classes. An example of this would be the number of impressions in a digital bank rather than specific digital assets (pre-roll, banner ads, ownable space for the sponsor on the property’s website).
This flexibility enables you to adjust your activation plan from year to year over the term of your sponsorship agreement so that the sponsorship supports your evolving needs and objectives.
Escalator
The deal escalator is the percentage of base rights fee that increases year-over-year for the term of the agreement.
Escalators are often an area where sponsors see an erosion in the value of a sponsorship deal. A brand signs a five-year deal, with an innocuous seven percent annual base rights fee escalator on the deal. A strong value proposition for the brand in year one of the deal may become a weak value proposition in year five of the deal after the base rights fee spend balloons, in this example, by a compounded 31 percent.
Term
The duration of a sponsorship agreement drives value, and the value that it drives has context.
For flexibility for the sponsor, shorter terms can be more favorable in an uncertain economy or in more volatile industry categories. However, to protect the equity that’s been built in the association between the sponsoring brand and the property, longer term deals can be favorable. In a highly competitive industry category longer terms can also act as competitive blocks.
Longer terms tend to deliver better base rights fees for a sponsor. They also provide the property with secured multi-year revenue and doesn’t require the property’s associated costs and risk in taking the category to market more frequently.
‘Gated’ terms can provide flexibility for sponsors and some security for properties. A gated term splits the commitment and provides opportunity for the sponsor to exit at threshold points. In some cases, the sponsor and/or the property can renegotiate elements of the deal, effectively mid-term.
Rather than a five-year term, a gated term might be a three-plus-one-plus-one-year term; at the end of three years, and at the end of four years, the sponsor may have the option to terminate the agreement, or to renegotiate the deal, or elements of the deal. These options could also reside with the property: termination, or renegotiation.
The deal structure of a sponsorship agreement between a sponsor and a property is crucial in driving value in the contractual relationship for the sponsor. The various levers of the deal structure, including base rights fee, variable compensation, asset package, escalator, and term, are not equally weighted in importance. Brands can manage downside risk and ensure fair value is delivered through the term of a sponsorship agreement with the introduction of variable compensation. Asset packages should be customized to the sponsoring brand’s objectives. The duration of a sponsorship agreement drives value, and the value it drives has context. When developing and negotiating contracts, sponsors should carefully consider each lever of the deal structure to support optimal value.
By: Ian Malcolm and Paul Macklam
