Once you receive a proposal from a property that is a good fit you must keep in mind you are not at the finish line. The brunt of the evaluation and necessary due diligence is ahead. There can be limited negotiation windows, threats of competing bidders, and significant temptation that can lure you into expediting steps to secure the deal, but the extra care will pay off. Keeping the following lookouts and guards in mind can be the difference between ROI success and failure when shaping a deal.

Psychological Watchouts

When it comes to sponsorship investments, there are two natural tendencies that come into play. Being aware of both can help you avoid paying above fair market value.

1.      Confirmation Bias: The tendency to interpret new evidence as confirmation of one’s existing beliefs or theories.

Properties are very good at promoting themselves. They will often creatively position their data to show how your target market aligns with their fan base, how the media exposure they generate is multiples higher than the fee that would be paid, and that their organization is on the doorstep of having its best season ever. Properties are not doing anything disingenuous. They are simply putting their best foot forward. It’s important to critically examine all property-supplied information that helps demonstrate the business case for the investment. Often, when buyers have already identified properties as a fit, it can lead them towards taking all data and citing them as evidence supporting the case to do the deal. You must use a discerning eye when citing property data as deal justification internally. You should catch and force yourself to equally disprove the case to buy as prove it.

2.      The Anchoring Effect: A cognitive bias describing how people rely too heavily on the first piece of information they receive.

When properties throw out the first price for a sponsorship, it automatically creates a gravitational pull in the minds of buyers towards this first proposed value. Regardless of what the fair market value should be, your idea of the correct transaction price will hover towards the initial fee. Without due diligence, this can lead to sellers securing aggressive asking prices. Before even receiving a proposal, it would be in your best interest to have a sense of what the market bears for similar deals.

Conduct a Third-Party Valuation

The best guard against these innate psychological factors is conducting a fair market valuation of the proposal with a company that has no rooting interest or financial connection to the deal. By relying on outside counsel to set what the true value is, you will better understand what the deal is worth and whether you should consider alternative opportunities.

A proper full-asset valuation also reveals how, where, and why the value is being driven. This is helpful when trying to optimize a deal to achieve your specific goals. By knowing how much value each asset contributes and what it’s likely to accomplish, you can understand whether it should be kept or exchanged and for how much value. This process of properly shaping a sponsorship will make it purposeful, eliminate waste, and heighten the chances for a positive ROI.

The other advantage is that using a third-party valuation is an additional check against confirmation bias of supporting agencies of record. While the spirit of the agencies’ own due diligence is coming from the right place and can be very helpful, the results and recommendation can be skewed towards affirming the desired outcome. This can come in the form of steering the analysis to pre-conceived notions or strategies that have been previously sold in, rather than evaluating the deal in a vacuum. You should receive the perspective of a third-party, like IEG, that has no history or conflicting interest in the agreement. IEG does not engage in buying or selling partnerships but rather prioritizes being a trusted, independent resource in the marketplace. We believe all parties benefit when the integrity and full potential of sponsorship is used.

Avoid Contractual Pitfalls

Outside of ensuring you receive a purposeful and fairly priced package, there are several other blind spots that you need to check before finalizing a deal. These areas of exposure are not necessarily nefariously buried in the fine print of contracts by properties, but they do tend to limit your chances for achieving a positive ROI.

Category Exclusivity: Make sure that if you are paying a premium for category exclusivity, it blocks all direct and perceived competition. Generally, fans do not know what brands offer which exact services and they often only give credit to the most memorable brand as a sponsor. Even if a brand is not a direct competitor but is more memorable or in the same category neighborhood, try to broaden your exclusivity definition as much as possible to defend your mental territory.

Escalators: Keep in mind that small percentage escalators might seem relatively harmless over the life of a deal, but keep in mind they are compounding. If a first year $1,000,000 deal has a five-year term has a five percent escalator, that amounts to over half a million over that first-year price over the length of the deal. Often it is in the best interest to get a flat fee that can be expected year-over-year (even if it costs more for the first couple of years) and doesn’t require an annual budget increase that might need to be lobbied for.

Deal Duration: The term of a deal is all about securing the future without over-committing. The best compromise is to secure a longer-term deal but include opt-out windows that allow you the ability to exit early if the brand decides it would be best.

Use of Likeness: The ability to use the IP of a property by a sponsor can be extremely valuable. So often properties receive the final say in what is and is not permissible. Ensure the extent to which the IP can be used is clear and/or stipulated and that it aligns with the brand’s vision of usage.

Activation Fund: Properties understand that your needs and priorities change over time when it comes to activation. That is why they often put in flexible spending funds that can be put towards new assets each year based on your needs. This approach makes great sense, but often the value of what needs to be allocated to secure new assets goes undefined. It allows properties to then set pricing for secured assets at whatever they see fit. You should either nix activation funds all together and receive that money back to activate as the sponsor sees fit, or at a minimum stipulate how much different opportunities cost ahead of time.

It is critical to conduct due diligence and be aware of potential challenges that can inhibit you from securing a favorable sponsorship. By being aware of these factors and taking the time to properly value and craft a purposeful sponsorship, you will prime the partnership for over-achieving against your goals and mitigate the chances of over-paying, both of which translate to maximizing ROI.