Building a Brand Licensing Agreement: What You Need to Know
Curious about brand licensing? You are not alone. In today’s competitive marketplace, brand licensing is practically the norm for businesses hoping to share their products with a wider audience. The benefits are numerous—whether you are a large-scale operation, or just starting out as a local business. If your brand has value, even within a tiny niche market, licensing may be right for you.
But what exactly is a brand licensing agreement?
How license agreements work
A license agreement is a business contract shared between two parties. A licensor, who owns the product or brand; and the licensee, who purchases the license with the intent to work with the existing product or brand. Simply put, it is a contract that allows one company to use another company’s intellectual property.
For example, film companies sell licenses to manufacturers, i.e licensees, who create clothing, accessories, toys, and electronics with the likeness of their movie's characters on them. Sports teams also sell licenses to companies who make various types of products that feature their team logos.
For companies that have great ideas but limited methods of manufacturing available to them, licensing is the best way to bring a product to a mass market while offering the most potential for return on investment.
What are the benefits to brand licensing?
There are many ways in which a licensing agreement can significantly boost your business, including:
Licensing your brand means creating a partnership with another business, granting you access to another entirely new audience. It’s win-win! Both parties increase their respective levels of exposure while reaping the benefits of the other’s existing base.
Stronger Relationships With Customers
Giving your brand a wider reach is not only lucrative in the short-term, but it also accounts for greater, long-term trust from your audience. When your company jumps from a small outfit to one with wider visibility, your client base is likely to develop an even greater sense of loyalty because they know, having stuck with you from the beginning, that your potential for global recognition is high.
In order to maintain the right to sell the product, the licensee pays royalties to you, the licensor—based on either a percentage of sales or as a flat rate. Depending on the type of product you are licensing, this additional income can prove helpful during periods of low sales or seasonal curves.
As always, there can be drawbacks to success. Your brand may one day reach TOO many people, or create TOO much activity, thus resulting in counterfeiting attempts by other competitors. By licensing your brand early on, you learn how to be proactive about protecting your intellectual property with safeguards.
Speaking of protection…
How to properly license your brand
Creating a foolproof licensing strategy guarantees that your product is not only protected but will ultimately prove beneficial for your overall brand. Here are some steps to consider before putting together a licensing agreement:
Don’t share too much
Before you agree to work with a licensee, you want to ensure that you don’t give away too much access to your assets. Work with an attorney who specializes in intellectual property, and make sure that your assets are trademarked well before going into negotiations.
Know what you are looking for
When sharing your ideas and asset(s) with another company, you are taking on a significant risk. So it goes without saying that you should do your research. Work with a licensee that specializes in dealing with your particular brand—ideally, stay within the same industry.
Get some experts on your side
When you are ready to move ahead with your potential licensee, the decision to hire a licensing agent (along with your intellectual property attorney) should come next. As your agent works with you to draft up a license (more on that below), be sure to consider your own wants while also anticipating the licensee’s expectations.
What to include in your licensing agreement
All licensing agreements are unique in context. However, the most effective examples tend to follow a uniform layout. Here are some of the sections, tabs, and headers that should be included in your licensing agreement:
Clearly defined titles — include the names of both parties, with identification: who is the “licensor” and who is the “licensee”?
Subject — a comprehensive description of the product or service being offered for licensing. This is also the area in which to include patent, copyright or trademark numbers, if applicable.
License — the agreement itself, including terms and conditions (time limits, territories) and the distinction of exclusivity. It’s also important to itemize all of the methods in which the licensee can use, sell, produce, sub-license, share or export the product.
Payment details — what the licensor is promised, in what capacity and for how long the terms of compensation are valid. Information regarding required audits or sales monitoring can be included here, too.
Restrictions — you may be signing over your life’s work, but you can include as many restrictions as you like. What the licensee cannot do with your product is just as important as listing what they can.
Start and end dates — calculate and write out when the agreement goes into effect, and when the terms come to an end. If you wish to include the possibility of continuation after the agreed upon terms expire, you can include as an addendum.
Definitions — having a list of clearly defined product-specific terms and/or industry jargon would be beneficial for both parties. This way, everybody is on the same page and there can be no room for confusion or misinterpretation.
Exclusivity and territory — the licensee gains the sole right to manufacture and sell the product in question within a specific territory. The licensor agrees not to allow any other party to manufacture or sell the product in said territory.
Sales monitoring — it is common to request the right to monitor sales figures to ensure that products are not being discounted.
Quality assurance — you can include a section requesting that specific tests be performed in order to ensure the protection of your product (i.e., quality, durability). When you decided to work with another company on your product, your brand becomes automatically associated with the quality of the product that someone else produces. Choose wisely.
Non-disclosure — additionally, a sub-agreement may be proposed to protect the licensor's property further. This is the NDA—the non-disclosure agreement. This document prevents the licensee from sharing or discussing certain details of your product with third parties. NDAs are simple enough to draft and should be considered a mandatory component to your licensing agreement.
Now that you have a list of items to include in your proposed license, the final and crucial step is getting both parties together to negotiate the best deal.
How to negotiate the best deal
Negotiating a licensing agreement efficiently can be tedious and time-consuming. Again, each deal is unique, but the negotiating process is primarily the same.
Contract negotiations are brutal. Begin with the simplest components in order to build some momentum. In no time, you will have developed a natural rhythm for including and omitting certain factors with force and confidence. Also, as the licensor, time is on your side. Do not feel the need to rush into anything.
Prior to negotiating, you should consider your licensee’s reputation within their respective industry. What are their strengths? What are their weaknesses? How long have they been in business? Is there any feedback you can gather? The more insight you have, the better advantage you’ll have when it comes time to talk figures.
Wear your game face
Remaining positive throughout the entire process will only help you in the long run. Once the deal is signed, you will be working with these people a lot. Set the tone from the get-go, and let them know that you are committed to making your partnership fruitful and mutually beneficial.
Pick up the phone
Email is great and more convenient than not. However, nothing beats the human touch. With a deal of this magnitude on the line, speaking to another person conveys an emotional connection that is invaluable.
Know when to hold ‘em
You are not going to get everything you’re hoping for, but if you begin by laying out everything on the table, you immediately lose a great deal of power. Do not show all of your cards at once.
Know when to fold ‘em
If, after giving it your all, you feel that you cannot negotiate as your own representative, bring in a professional. There are plenty of industry experts who would be happy to help, and bring with them significant knowledge and industry expertise.
There you have it. The undeniable benefits of building a brand licensing agreement. Wherever you intend to take your business, know that you have options for greater brand visibility, long-term growth and the perks that come with working alongside a licensed partner. Getting to that first step is simple. Where you take it? The sky is the limit.