License To Profit

Make your play for a piece of the $100 billion licensing market.
Magazine Contributor
11 min read

This story appears in the January 1997 issue of Entrepreneur. Subscribe »

To many, it seems to be the key to a gold mine. Putting a Notre Dame logo, a Lion King character or a Jurassic Park 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 $100 billion retail market worldwide, with $70 billion in business in North America alone, says Murray Altchuler, executive director of the International Licensing Industry Merchandisers' Association (LIMA). But "a license is not a [prescription] for instant success," he cautions. "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 of all," Altchuler explains, "it may mean you have something unique your competitors don't. Second, it may mean getting a little better margin because it is unique. And third, it may mean that 10 percent of the retailers you call on that you have 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." Another benefit, Altchuler adds, is that licensing positions you as a leader.

Showing Your Strengths

Who can obtain a licensing agreement? The list runs the gamut from a multinational conglomerate to a mom and pop company. 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.

Consider New York City-based Apparel Dynamics Inc., a year-old firm that has snagged some fairly major licenses, including cartoon characters Rocky and Bullwinkle, The Big Comfy Couch and C-Bear and Jamal.

"Most people in apparel go by reputation, and we've been doing this for years," explains Robert Reda, vice president of merchandising and The collective experience of the company's key people, combined with the industry savvy of their licensing consultant, Cheryl Stoebenau, has helped open doors for Apparel Dynamics. When going after licenses, Reda says the company also flaunts its creativity. Furthermore, it stresses the advantage of working with a small firm--fewer licensed products means they can spend more time and energy on the ones they have.

Entrepreneurs who have less experience must rely on the quality of their product line and the strength of their proposal to attract a prospective licensor.

A unique product helped San Diego-based Fotoball U.S.A. get its foot in the door of sports licensing, says Carl Francis, the company's vice president of retail development. "CEO Michael Favish started the company on his living room floor [in 1986] by patching together a soccer ball [with photos of different soccer players on it] and presenting it to the licensing entity for World Cup Soccer," says Francis. "No one else in the market had anything like it. They loved the idea, and he got the license."

From there, Fotoball expanded into similar products for the National Football League, the National Hockey League, Major League Baseball and various colleges and universities.

Francis, who gave Fotoball its first baseball licensing contract while he was working in licensing for Major League Baseball, says there is still room for an entrepreneur to get a license with a major league sport. The key is finding a market niche and filling it with a unique product that has wide consumer appeal and will carve out new avenues of revenue for the licensor.

Choose Your Target

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, suggests Francis. Once this is accomplished, then decide what licensing products you want to target.

Finding potential licensors is not difficult. LIMA sponsors an annual show in New York City, with the next one, Licensing '97, slated for June 10-12. It will feature more than 2,000 available properties.

TheLicensing Resource Directory, published annually by Expocon Management Associates, is an excellent resource. It lists properties alphabetically, then cross-references them by owner and category. The directory contains more than 3,000 listings and various how-to tips, as well as information on support organizations, consultants, attorneys, designers and other people specializing in licensing.

"I recommend going down the list of properties with a pencil and putting marks beside all those names that ring a bell," Altchuler says. "If you haven't heard of them, chances are they won't have much value to you."

Next, Altchuler advises doing a little market research by talking to your target customers to see if the property is something that might interest them. Check out consumer and trade publications to get an idea of what licensed properties might appeal to your intended customers.

For information on what's happening in the licensing industry on a monthly basis, look at the newsletter The Licensing Letter from EPM Communications. EPM also produces The Licensing Letter Resource Sourcebook, which lists the top 4,000 executives involved in the licensing industry. And Adventure Publishing puts out a weekly newsletter, The Licensing Report, as well as a monthly magazine called The Licensing Book.

A licensing consultant can be a valuable asset to a company that doesn't have the internal resources to dedicate one person to studying the licensing industry, says Stoebenau. "A consultant helps a company identify and acquire a licensed brand or character for their product line," she explains. A qualified consultant can help a manufacturer determine if a licensed property could enhance its product line and how to use it most effectively, adds Gary Caplan, a Studio City, California, marketing and licensing consultant.

When looking for a consultant, be aware that terminology is critical, stress Stoebenau and Caplan. A licensing agent represents the property being licensed, a licensing con sultant represents the manufacturer seeking the license, and a marketing company is not necessarily a licensing expert, although many include licensing as part of their services.

Most licensing consultants work by contract and on retainer, says Caplan, although arrangements can also include a retainer plus percentage of sales agreements or per-project arrangements. To find a licensing consultant, contact LIMA, check licensing resource directories or attend licensing shows.

Lets Make A Deal

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.

At Film Roman Inc. in North Hollywood, California, producers of the animated versions of C-Bear and Jamal, Bobby's World, Felix the Cat, The Mask, Mortal Kombat: Defenders of the Realm, Richie Rich, The Simpsons and Garfield, people interested in becoming licensees go directly to Jacqueline Blum, senior vice president of worldwide licensing and marketing.

"We're looking for someone who is going to partner with us on a project with the same creative integrity and passion for the property as we have; someone who can help get the products on retail shelves," explains Blum. "We try to decide what the product is best suited to."

Describing Film Roman as a new and smaller player in the licensing arena, Blum says her staff welcomes people calling with ideas.

While Film Roman handles its own licensing, many larger entities, such as Minor League Baseball, have turned those functions over to a licensing agent.

"We're always looking to diversify our product line--that's probably number one on our list," says Misann Ellmaker, director of licensing for the National Association of Professional Baseball Leagues. Its licensing agent is Major League Baseball Properties, which represents about 155 of the minor league teams in the United States and Canada and earned sales of $45 million last year.

"If you want to be a licensee with us, you don't necessarily need sophisticated retail distribution avenues because you could distribute only to the [ball] clubs, for instance," explains Ellmaker, who says all the clubs have gift shops and souvenir stands a licensee could sell to. Many also have mail order operations or even off-site stores; entrepreneurs could sell to a single club or an entire region.

Those looking for national retail sales, on the other hand, must have the capital to get the product out into the market and onto store shelves.

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. That's why Altchuler suggests beginners 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.

The marketing plan is another critical component of your proposal that could tip the scales in your favor. Francis suggests getting booths at licensing or gift trade shows to test-market your product. He also says creative marketing arrangements such as working out low- or no-risk test programs with retailers may be another avenue to take.

Another good marketing approach is establishing a relationship with a distributor who has major retail clients. This might make it easier to target a broader base of potential sales outlets.

Sign On The Dotted Line

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.

The contracts' length and the process for renewing them varies among companies. "We usually renew automatically," says Blum. "There is a renewal clause [in our contracts] that says if you meet certain financial and quality obligations, you get an automatic renewal. This is negotiable and varies from license to license."

Major League Baseball, on the other hand, does not automatically renew. Instead, it requires licensees to prove they earned the money paid to the league and asks companies to submit marketing plans for the next contract period, says Francis.

While sports teams, TV shows and movies are among the best-known licensed properties, they aren't the only avenues. Harvey Christie, a Pickaway, West Virginia, manufacturer, took a less traditional route.

When the founder of Diversified Nature Associates Inc. began selling his herbal vinegars at local specialty shops and state fairs, he had no idea it would lead to private-label agreements and, ultimately, licensing for world-renowned five-star resort The Greenbrier in White Sulpher Springs, West Virginia. The Greenbrier vice president of food and beverage, Rodney G. Sterner, came across the vinegars at a state fair in 1990 and was so impressed, he asked Christie to make all the resort's specialty foods under a private label arrangement.

In 1993, the agreement expanded into licensing--and sales increased 125 percent that year. "We help develop products with their chefs, and once we get their approval, we get to use the Greenbrier label on the jar," explains Christie, 32. As part of the licensing agreement, Christie sells Greenbrier products only at upscale specialty food companies.

Although he hadn't been considering licensing when The Greenbrier approached him, Christie immediately saw the possibilities. "The name Greenbrier is like gold in the culinary world," he explains. "We had tried to do wholesale marketing [to a larger food-store chain], and it was like `Diversified who? Why would we want to buy from you?' " Today, just as Christie hoped, the Greenbrier arrangement has opened the door not only to wholesale marketing but also to other licensing agreements with clients such as The Red Fox Inns.

That's the advantage of licensing, agrees Altchuler: It offers a wedge to help open doors. But he also warns that you must tread cautiously, "particularly in the entertainment field. You may think `Gee, I'll have guaranteed sales,' but what if the movie bombs at the box office?"

Blum agrees there is no pat formula for success. Her recommendation: "Create an engaging, fun and exciting product, and find a way to promote it to consumers so they like it and connect with it."

In other words, the recipe for licensing success is the same as for success in any business venture.

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