Businesswoman smiles as she makes a deal.
Many companies, from major corporations to small independent artists, recognize the benefits of licensing their brand. — Getty Images/pixelfit

Have you ever considered licensing your brand to create residual income for your business? Before you approach a licensing agency to put your brand “on the market” for licensees or say yes to any deals, think carefully about what it means for your brand.

Licensing your brand can create passive income, but as with many elements of business, you’ll need to put in some work upfront for a smooth relationship. Carefully consider the benefits and potential pitfalls of licensing your brand, and then put the right systems in place to ensure your brand is represented in a positive way and that your licensees can maximize the return on their investment, which will help you boost your bottom line.

What does it mean to license your brand?

When you license your brand, you are giving another company permission to use your intellectual property on products they produce and sell. You can earn an upfront advance as well as royalties, which are calculated as a percentage of total sales or net profits, depending on the licensing agreement.

[Read: Intellectual Property: Differences Between Patent, Copyright and Trademark Laws]

Benefits of licensing your brand

Many companies, from major corporations to small independent artists, recognize the benefits of licensing their brand. Consider some of these major benefits:

  • Increase profit without cost risk: You can earn royalties without investing any money into the production, marketing or distribution of the goods.
  • Increase brand recognition: If you are not already a big name in your industry, you’ll benefit from more people seeing your licensed merchandise. And if you are well-known, you can expand into other markets through licensing for increased visibility.
  • Expand your market internationally: Licensing enables you to expand into foreign territories without added tariffs or the hassles and stress of building relationships with retail outlets or distributors overseas.

Potential pitfalls in licensing your brand

Of course, as with any business venture, licensing your brand has some potential pitfalls that you should watch out for. Being aware of these pitfalls, and putting systems in place to combat them, can help ensure a successful licensing arrangement.

  • Risks of intellectual property theft: Licensing agreements should be clearly defined in terms of how and where the licensee can use your intellectual property (IP); however, it can be challenging to police all the uses of your brand or its IP. If you give a company permission to use a character on a t-shirt, for instance, the company might take the liberty to also use the art on a tote bag. You could lose out on royalties that you deserve.
  • Competition in the marketplace: You could limit licensing agreements to items you don’t personally sell or manufacture. But if you license the rights to use your brand in certain markets, you will have competition if you decide to enter those markets in the future.
  • No guarantee of income: Nothing is guaranteed in business, but licensing your brand does carry the risk that you will agree to a license and never see any royalty payments. On the positive side, you didn’t lay out money to manufacture or market the products, so you’re losing less than the licensee.
  • Loss of control of your brand: If you don’t have specific and strict licensing requirements — and you don’t take time to enforce them by keeping an eye on companies licensing your brand — your brand’s reputation could suffer.

It’s crucial to protect your brand’s reputation by ensuring that not only is your IP reproduced faithfully, but that the products using your IP are manufactured to strict quality standards. You also want to make sure your IP is only used on products that are consistent with your brand.

For instance, a brand wouldn’t want a beloved children’s character depicted on a bottle of alcohol.

[Read: How to License Your Artwork]

To ensure the accurate reproduction of your brand by licensees, create a licensing guide and consider holding training that outlines the appropriate use of your IP and what licensees can and cannot do.

Partnering with licensees: Mind your P's

When you’re partnering with a licensee, you want to ensure that not only is the licensee depicting your brand in an accurate – and positive – light, but that they are maximizing their chances of profitability with relevant, well-marketed products.

Consider the “three P's” of licensing, which originated as guidelines for collegiate licensing, but are good rules for any organization to follow:

Protection: Protect your intellectual property

To protect your brand, you want to make sure that your IP is only reproduced on relevant, appropriate, well-manufactured and high-quality products. You also want to make sure that your IP is reproduced accurately. It would not be appropriate, for instance, to change a professional sports team’s colors on a hat or jersey.

[Read more: Roadmap for Rebuilding: Marketing and Protecting Your Brand]

To ensure the accurate reproduction of your brand by licensees, create a licensing guide and consider holding training that outlines the appropriate use of your IP and what licensees can and cannot do.

Promotion: Ensure your licensees have a marketing plan in place

While it doesn’t cost a lot in time, money or human capital to enter a licensing agreement, there is some outlay. Because of the risks involved in licensing, including creating competition in the marketplace, you want to be sure your licensees will maximize their profits. Make sure they have a strategic marketing plan in place to promote your brand.

Profit: Make sure your royalties are worthwhile

Is it worth it to license your brand? You want to make sure the potential profits exceed any of the risks of entering a licensing agreement.

The best licensing arrangements often blossom into productive partnerships, with both companies helping each other to grow through synergistic ideas and cross-marketing.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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