Licensing

Definition: A business arrangement in which one company gives another company permission to manufacture its product for a specified payment

There are few faster or more profitable ways to grow your business than by licensing patents, trademarks, copyrights, designs, and other intellectual property to others. Licensing lets you instantly tap the existing production, distribution and marketing systems that other companies may have spent decades building. In return, you get a percentage of the revenue from products or services sold under your license. Licensing fees typically amount to a small percentage of the sales price but can add up quickly.

For example, about 90 percent of the $160 million a year in sales at Calvin Klein Inc. comes from licensing the designer's name to makers of underwear, jeans and perfume. The only merchandise the New York-based company makes itself, in fact, are its women's apparel lines. Many large corporations, such as the Walt Disney Co., generate less significant proportions of their revenue from licenses. IBM, after energizing its efforts to license its thousands of technology patents a few years ago, now attributes $1 billion a year of its corporate sales to licensing. The downside of licensing is that you settle for a smaller piece of the pie. Calvin Klein-branded products, for example, generate $5 billion in sales a year, the vast majority of which goes to licensees and retailers. At the same time, licensing revenue tends to be high-margin, with almost all the fees from licensing flowing straight to the bottom line.

On the other side of the coin, you could be the one with the interest in licensing the high-recognition brand name of another company. To many, it might seem like the key to a gold mine: Putting a Notre Dame logo, a Lion King character or a Star Wars graphic on your product means guaranteed success, right?

For a sure thing, prepare for a frustrating search. But if you're willing to put some time and effort into making your product work, buying the licensing rights to a well-known product or name can substantially increase your chances for success.

Licensing is a billion-dollar retail market worldwide. But a license isn't a prescription for instant success. It gives you the borrowed interest of a name that is either unique or has some consumer acceptance, but it still takes good selling and marketing to succeed. A license is, in essence, a tool, and when used well, it's an extremely cost-effective marketing tool.

Licensing offers three major advantages. First, it may mean you have something unique your competitors don't. Second, it may mean getting a little better margin because it's unique. And third, it may mean that 10 percent of the retailers you call on that you've never been able to sell to will finally take a look because you have something different. And when that happens, you can sell the rest of your line.

Who can obtain a licensing agreement? The list runs the gamut from a multinational conglomerate to a one-person operation. But in general, a licensor looks for the strongest company in terms of finances, manufacturing and marketing. The good news for small business is that strength is not necessarily measured in dollars or longevity.

Before you tackle the licensing industry, you need to have your own house in order. Make sure you have or can get financing, ensure that your manufacturing capacity is up to snuff, and establish distribution channels. It's also a good idea to try to establish a sales history for your products. Once this is accomplished, then decide what licensing products you want to target.

Once you know who you want to target, the next step is talking to the company or its representative and convincing them of your product's potential. Large organizations will most likely have people who oversee licensing and marketing or will have turned those functions over to a licensing agent. You can determine the proper person to speak with by contacting the company directly to ask about licensing opportunities.

Deciding which licensor to approach means evaluating your strengths. The bigger and more popular the property is, the more it's going to cost to secure the licensing rights. Beginners should probably start out small to learn the ropes.

Once you begin approaching companies, many will ask you to fill out a licensing application, and all will ask for a business plan detailing how you propose to market the product, who your target audience is and what you estimate sales could be. Most licensors will also request product samples.

What happens after the licensor says yes? Most, if not all, companies will ask for a minimum guarantee of sales covering the life of the contract paid in advance or in installments, and will charge royalties as well. Royalties are a percentage of sales paid by the licensee to the owner of a property or a designated agent, usually based on the net wholesale selling price. Some licensors are willing to negotiate these fees; others are not.

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