Licensing Can Work for Small Businesses Too

Normally the subject of licensing would not appear in a Bootstrapping context because there usually is an up-front cash payment and a guarantee associated with securing a license. These two factors can be substantial with a high visibility license, such as Mickey Mouse, NFL football, Nike, Armani, etc. However, I bring it up here for two reasons:

  1. In the early stages of your business, a good license offers advantages as well as potential pitfalls. An early understanding of the how-to’s of licensing can aid you in identifying license opportunities and how to capitalize on them.
  2. I believe there are some niche licenses in the early stages of your company where no cash up-front is required and your only payments are royalties (a Variable Expense). One example of this was in our second year in the watch business (A mature industry with many large companies). We secured the watch license for the Wizard of Oz and Gone with the Wind. We paid no up-front monies, only a royalty on shipments. It was a not-in-demand license; we had good marketing experience in other industries; most of all, our plan to sell to a niche market (Direct Response Companies and Collectibles) was well received. We were successful and gained needed credibility in a new field for us. This led us to eventually secure licenses for Elvis Presley, the NFL, NASCAR, Precious Moments, and others. Our concentration on untapped watch markets and our unique watches powered our success.

Here is a short tutorial on the license industry.

First, Licensing is the process whereby one company uses the trademark, property, or brand name of another company in return for some form of compensation. In most cases, the licensor grants the licensee some sort of exclusivity—perhaps geographical, perhaps by product, perhaps by distribution channel. Most often, the compensation involves some sort of up-front fee and a percentage of sales (a royalty).

There’s an amazing range of products for which licenses are issued. They include, for example, limited-run automobiles, perfume, plates, cereals, vitamins, toys, clothing, jewelry, and beverages. The number and volume of licensed products seems to grow each year. The total volume at retail for the year ending 2007 was $180,000,000,000, according to LIMA, the industry association.

Why go this route? There are at least seven good reasons:

  • More Credibility in selling into established distribution channels. This is particularly true for young companies. The right name of the license on your product will get you in the front door with your target customer. If this particular licensor’s goods have performed well in this distribution channel in the past, your product is less risky for this retailer. Your potential customer may not have heard of you, but they most likely will have heard of your licensor.
  • Competitive Advantage. A license takes your product out of the commodity class—it’s not just a watch; it’s a Mickey Mouse watch—and simultaneously protects your product from being knocked off. This, in turn, means that you can usually build and maintain higher profit margins despite the higher selling price that is necessitated by the pass-along of royalty charges.
  •  Better Sell-In. In many situations, a specific license will open the door to sell a new account or to sell more products to an existing account.
  • Better Sell-Through. Because consumers recognize and (hopefully) like this brand or image you’ve licensed, they will pull your product through the distribution channels. This will lead to the reorders that will keep you in business.
  • Better products. In some cases, a licensed process or  technology permits the licensee to make a more valuable product and to get into markets that he or she otherwise couldn’t penetrate.
  • Access to capital. A good license will assist you in getting capital (whether invested or loaned). Smart “money people” know the value of an appropriate license.
  • More company value, more quickly. A successful licensed product builds the value of your company which will help you if you sell, go public, or merge.

In light of all these benefits, licensing may sound like a gold mine. In many ways it is. However, as in all other realms of business, there are questions to be answered and obstacles to be overcome on the road to success.

The first question you need to answer, honestly, is whether your product is good and whether there is a demand for it. Just as great advertising can’t sustain an inferior product indefinitely, a good license can’t rescue a bad product. Don’t pay somebody else money for the right to produce a product that nobody wants.  As licensing consultant Stu Seltzer says, “Licensing can make a good product great. . .but it cannot make a bad product good.”

The second thing to be aware of is that licensing is a competitive field. Lots of people want to use Mickey Mouse’s face. As a result, Disney can afford to be choosy and expensive—and they are.

What does a potential licensor want to see when he looks at you? One major licensor, Peter Van Raalte, former VP of Turner Entertainment and Scholastic Entertainment, Inc., told me that he looks for six things when evaluating a potential licensee:

  • Distribution

    Click to Buy

  • Distribution
  • Distribution
  • Creativity and quality
  • Appropriate positioning of the property
  • Financial responsibility

In my experience, all licensors put an overwhelming emphasis on distribution. They are granting you a valuable right in the expectation that you can get enough orders in markets where they think their products should be available. This means that you’re likely to be asked about your distribution capability. Although this is, in many cases, an obstacle, it may also be an opportunity. Licensors with strong properties are increasingly inclined to award licenses by channel of distribution. If your company is new and inhabits an unusual niche—say downloadable Internet games—a channel-specific license may present a special opportunity.

When licensors evaluate you as a potential licensee, they will check your references with retailers and other licensors (if any). They will want to know your market strategy, point-of-product differences, quality, and on-time delivery record; and they will want reassurances that you have the financial strength to do a good job with the property. Finally, they may want to explore whether your corporate philosophy and culture fit well with their own.

Looking at licensing from the other end of the telescope: As a licensee, you have to choose your licensed product with care. Here are some sensible questions to ask:

  • Does this relate to the consumer of my product? (Do I want a Big Bird license for my watch company if I’m convinced that most preschoolers can’t tell time and don’t wear watches?)
  • Is this a good fit with my product? (If I make farm implements, how valuable is a ready-to-wear designer brand name?)
  • Do the buyers in my major channels of distribution think highly of this license? (How hard will they work for it if they don’t?)
  • Can I afford the guarantee, advance payment, and other commitments related to this product? Are the royalties too high for the product? Is this license strong enough to make up for the higher retail price it will have to command?
  • Is this a license I want to put resources into and build for the long term, or is its value short term or tactical—e.g., to sell one account or one channel of distribution?
  • What’s the reputation of the licensor? Will they renew my contract if I do a good job? Will they award too many licenses to competitors in my category? What type of artwork will they provide and at what cost? How long is their approval process? Is their contract fair, and can I live with it? Can I trust them?
  • What is the licensor’s policy when major national retailers come to the licensor to give them exclusive product? Will they work through their licensee, or will they do a direct deal and circumvent the licensee? Most licensing contracts are non-exclusive and would therefore allow the licensor to make these deals directly with a retailer.

Contracts deserve a closer look. While every licensing relationship is different, here are some of the topics that will come up in negotiations for a license:

  • Territory covered. Could be by country, geographical, distribution channel or even by specific accounts.
  • Products to be covered. You, the licensee, should try to keep it broad. If you make watches, you want the contract to say timepieces. This wording will cover you on pocket watches, clocks, etc.
  • Rates of royalty. Usually not very negotiable unless you have a product that is not replicated. As an early stage company, you might want to think of offering a higher royalty for no upfront costs or other goodies that are important to you.
  • Length of contract. You want longer; licensor wants shorter. You should strive for automatic renewals if certain targets are met.
  • Guarantees. Again, Licensee and Licensor are on opposite sides of the fence. Negotiate. . .Sell.
  • Promotional Dollars. The Licensor will usually ask you to commit for an amount of money to be spent on their licensed product. You want to stay away from high specific amounts. Your pubic relations competency can be worth more than paid ads. How will that be measured?
  • Advances.  Licensor will almost always ask for a check upon signing. If you are only licensed for a niche, that should be an argument for lower or no advance. As mentioned earlier, you could trade higher royalty for no advance. I personally always used my small company status as an asset, which gave us more focus, flexibility, passion, hunger to succeed, etc. We also needed the cash flow more than the rich licensor. Advanced with humor, it often worked.
  • Exclusivity. Many licensors give out too many licenses for the same category. This negates one of your prime reasons for taking on the license. Carefully assess this point.

As always, doing your homework is important. Before signing a license, check out other licensees about their experience working with this licensor. The Licensor will supply you with their list of licensees. Talk to potential customers. Develop a marketing plan before your first meeting, etc. The licensing business has become more sophisticated over the years, so put effort into your presentation and be professional.

Most importantly, when you get that first license, bust your butt to make it a success. The word spreads fast among licensors on who are the new rising stars. You want to be one of them.

The best place to contact for information on the licensing industry is:

International Licensing Industry Merchandisers Association (LIMA)

350 Fifth Avenue, Suite 4019

New York, NY 10118

Phone 212-244-1944

Fax 212-563-6552

(The above is excerpted from Bootstrapping 101.)