Doubtless, you’ve put in mad amounts of work to build your brand, and if things are going really well, you are probably (happily) exhausted. You might also be looking for a way to maintain a revenue stream while working less–whether you want more time to focus on a new project, of just to kick off your shoes and give your dogs a rest for a bit (no judgment here, btw).
In either scenario, if you’ve got a successful venture going on, licensing is a great option to generate income without too much extra work. You might’ve noticed that licensing isn’t just for superheroes and kids’ sleeping bags anymore. These days, the licensing model works brilliantly for various types of business models within the wellness/coaching/fitness, design and food industries, just to name a few. What follows are some general steps down the lucrative path to licensing.
These steps assume that you’ve already created an exemplary product or service. If you’re just starting out, and don’t have a solid product/service to start licensing yet, there’s no harm in educating yourself on the licensing process. Knowing that there is a solid path to a passive revenue stream might give you some much needed motivation to stick it through those tough, early days of building your business. You know, eyes on the prize, and all that good stuff.
Step 1: Bulletproof your exemplary product or service.
Having an exemplary product or service to license is, well, the necessary basis of starting a licensing program, but it’s not enough. Before you strike out in search of eager licensees you need to bulletproof your brand. This process will not only protect your valuable assets during the negotiating process with potential licensees, but it will also force you to identify any holes or areas for improvement within your current product/service offering. So, grab some Kevlar and duct tape, and let’s get busy with the bulletproofing:
- Secure your Trademark
Holy duh! This is so important. Licensees are drawn to your brand (and therefore willing to pay you money to use it) because of the equity it has in the market. If you haven’t protected your brand with a trademark, then your brand value, in the eyes of a licensee, is next to nil. Why? Because any old Tom or Sally can slap your brand name on their (potentially really crappy) product or service. And no licensee in his or her right mind is going to pay you a shiny dime to use your product or service with all those Tom and Sally’s running around sullying its name.Side note: Depending on your product/service, it may also be necessary for you to register a patent. Patents protect processes (read: inventions) in a similar way that trademarks protect brands. We won’t be covering patentable products and services here, but if you have those they are licenseable as well (in fact, they might be licensed most often).
- Register copyrights in your work
The same reasoning applies here as with trademark, kids. If you’ve got killer content, which, obviously, you do, then you need to protect that goodness with all of your legal might. Because, as we’ve already established, people named Tom and Sally are obviously not nice, and they will pillage your blog/website, and swipe all of your brilliant and pretty work. Of course, your work is protected by copyright at the moment you create it, but registering it with the US Copyright Office is a must if you plan to license it. By registering, you have a chance at recovering greater damages (that’s legal talk for “more money”) and if potential licensees are at stake, you’ll probably want a chance at those duckets (that’s cool people talk for “money”).
- Draft a non-disclosure agreement
This is the agreement that keeps potential licensees from telling everybody your business. Most likely, when you start courting potential licensees, you’ll need to divulge some of your most valuable secrets. And, allow us to get real with you for a second: it is not unheard of for big companies to swipe brilliant ideas from entrepreneurs and other small businesses under the guise of “licensing negotiations,” sell them on their own, rake in sick profits, and not share a freakin’ penny. Gulp.So, how do you protect your goodies during the licensing negotiation process? First, don’t divulge any more than is absolutely necessary. Second, draft up a super solid non-disclosure agreement and get that puppy signed by potential licensees as soon as it makes sense to do so (read: right away). Of course, licensees can always violate these agreements but it would be a bit glib to assume that all of them would. That said, a good non-disclosure agreement will provide for the right remedies (cough: injunctive relief!) to make it worth the other parties while not to violate it–even if the other party is a big, rich, powerful company.
Step 2: Maximize your profit-potential.
This is also an important step on the licensing path. It’s important that your product/service can generate enough profit for the licensing model to be worthwhile for your licensees. Likely, the licensee needs to be able to sell the product/service to the end customer at a premium price to make room for royalty payments (More on the royals later. Isn’t Harry dreamy?…).
This step isn’t just about giving your licensees enough room to make money and pay royalties though, it’s also about making the transaction between you and your licensee as profitable as possible for your business. When presenting to potential licensees, you have to be able to demonstrate that you’ve got your stuff together, so they feel confident in the potential income they can generate as your licensee and so they’ll be willing to pay you the premium price that it’s worth.
The specific steps you take to maximize your potential profit depend a bit on your business model, but will likely include things like: identifying areas of improvement in the actual product/service offering (content updates, product updates, etc); streamlining processes (is there any software you could introduce to make work more efficient?); identify and address existing bottlenecks; cut extraneous overhead, etc. Finally, don’t underestimate the value in making your product/service pretty– both licensees and end-consumers will appreciate good-looking content, packaging, etc. and it’s a relatively easy way to demonstrate value and position your product/service at a higher price point.
Step 3: Play the dating game.
The licensor-licensee relationship is a pretty serious one. Just like you probably wouldn’t go marrying the first Tom or Sally who offered to buy you an ice-cream soda (because this isn’t the 1950s, and we already WARNED you about that Tom and Sally), you might not want to enter into a licensing arrangement with everyone who approaches you. You’ll need to decide what your standards are for your licensees and how you plan to vet them. Will you allow anyone to license the product, so long as they are willing to pay the fees? What, if any, logistical structures will you require them to have in place prior to entering into a licensing agreement? What, if any, industry experience will you require of them? How will you assess their potential to maintain the reputation of your brand and products/services–personally, through your team, etc?
Step 4: Agree to agree (in writing, with signatures).
Once you’ve bulletproofed your brand, taken steps to maximize profits all around, and gotten to know your potential licensee to the extent that you feel confident in them maintaining your quality standards and brand value, it’s time to sit down with pens and sign a solid licensing agreement. Depending on the circumstances, the terms of the licensing agreement might be negotiated to some extent. However, as the licensor, you should bring to the table an agreement that is fair, but offers maximum protection for your brand, and is true to the goals that you, and your licensee are working towards.
Some pertinent parts of a licensing agreement–in addition to all the usual contract blah-de-blah– are:
The type of royalties you employ (advanced, ongoing, etc.) will depend on your business and your overall goals. You may even decide that you will only charge a single upfront fee for licensing, and allow your licensee to retain 100% of his or her profits during the term of the agreement. There are lots of options here. The crucial thing is that, whatever type of royalty plan you choose to implement, its terms are unequivocal in your licensing agreement.
- The length of the licensing agreement
Again the term of the licensing agreement is up to you, and should be based on what makes sense in the context of your product or service. You can set out a fixed term for the agreement (ie, 5 years) or set the agreement at one year, with options to renew (or not).
- Approval rights for marketing materials
The reputation of your brand is at stake here. To make sure things stay up to standard, you’ll likely want a paragraph granting you permission to approve marketing materials, etc.
- Copyright and Trademark notices
Let your licensee know when, where, and how these notices should appear on printed and online material, etc. Your efforts to keep your IP protected can be severely watered-down if your licensees aren’t making efforts as well.
This might actually be the most important clause in your licensing agreement. You absolutely cannot have licensees (remember Tom and Sally) out there dragging your name through the dirt, or in any way disparaging your products or services. Your licensing agreement should clearly state the licensee’s duties and obligations to maintain the goodwill of your brand. It’s in the best interest of your business and all of your other licensees.
These steps should help you map out a general path towards licensing your brand. As you probably realize at this point, these relationships are no joke, and there is a lot at stake for you and your business. It would be a solid idea to consult necessary experts (lawyers, business advisors, etc.) before entering into licensing negotiations. And, of course, keep an eye out for Tom and Sally.