When sales of licensed product fail to generate enough revenue to meet the minimum guarantee, it is called a(n):

• A. Underpayment
• B. Overpayment
• C. Shortfall
• D. Short royalty

Answer: (C)

The main idea is how revenue guarantees are settled when actual sales don’t meet the minimum. In licensing, a minimum guarantee ensures the licensor gets a baseline payment regardless of performance. If actual royalties from sales are below that guarantee, the gap between what was guaranteed and what was earned is called a shortfall. The licensee would owe the shortfall to reach the guaranteed amount, making the licensor whole for the minimum promise. For example, with a $1,000,000 minimum and $750,000 in actual royalties, the shortfall is $250,000. Other terms don’t fit this scenario: underpayment is too general, overpayment means paying more than owed, and short royalty isn’t the standard term for this situation.