Three coworkers working together at a desk.
Before you enter into a licensing agreement, make sure that you know and understand your licensing partner, their previous work and their plans for your brand. — Getty Images/Geber86

If you have product ideas, but not the infrastructure, capital or connections to manufacture those products with your brand name, licensing your brand could be a viable and cost-effective solution.

When you license your brand, you grant the rights to a licensing partner who can manufacture, market and sell products bearing your brand name. You’ll collect royalties from the arrangement and, oftentimes, an advance of those royalties in exchange for letting the licensee use your brand.

However, choosing the right licensee takes time, work and specialized knowledge. Ideally, you want to work with larger companies who are already experts in their market, have wide distribution channels and are willing to put together a business plan that looks like a road map to success for their product and your brand.

Of course, there are no guarantees in business, but choosing the right licensing partners can help increase your odds of earning money off a licensing arrangement while protecting the public perception of your brand.

Where and how to find licensing partners

Businesses often find licensing partners through licensing agencies who can help broker deals. Licensing agents typically have trusted companies they can work with. They can assist with negotiations, and even help with product concept reviews and approvals to expedite the licensing, manufacturing and distribution processes.

[Read more: How to License Your Artwork], a licensing software suite, suggests you might pay a commission as high as 30% to 35% of the royalties, but if you’re licensing multiple products for your brand, it’s worth hiring a licensing agency to take the stress out of managing the arrangements.

Find licensing partners that understand your brand

When you’re choosing a licensing partner, you want to ensure they understand your brand and have experience working with the same demographics that you target. Putting your brand on the right products with the right features for your market should be a partnership, where you are both bringing specialized knowledge and experience to the table.

How to draw up a contractual agreement

Your licensing agency can also help you draw up the licensing agreement that describes the licensee’s rights, royalties and the territories they can operate in. Before you sign any agreements, you want to be aware of some red flags that could make the partnership less than beneficial for you, the licensor.

If your licensee wants full international rights, proceed with caution. If the licensee’s products underperform in a huge territory, you won’t have the option of finding other licensees to pick up the slack. Although some licensees say they have a global reach, only 1% show true international success, writes Jeff Lotman, the founder and chief executive of brand-licensing agency Global Icons.

When you’re choosing a licensing partner, you want to ensure they understand your brand and have experience working with the same demographics that you target.

You might also want to steer clear of licensees who want rights to your brand “in perpetuity.” No business owner can predict the future, as much as they may try. Your licensee could suddenly shift its target market so it’s no longer a fit for your brand or it may not have success selling your licensed merchandise. Your contract should have a “claw-back” clause that lets you exit the deal if your licensee is missing minimums.

There is a lot to think about when you’re drawing up a licensing agreement; an agency with experience dealing with brands like yours can help you make sure you’re entering an arrangement that works for both the licensor and licensee.

Preserve your brand identity

Once you’ve found the best licensing partner to promote and distribute products bearing your brand name, it takes due diligence to ensure your licensee is:

  • Respecting your intellectual property and acting within the terms of your agreement.
  • Preserving your brand’s reputation.
  • Maximizing profitability through promotions.

You’ll want to make sure that your licensee is only manufacturing and distributing merchandise within the terms of your agreement. For instance, if they have a license to distribute children’s clothes under your brand name, you wouldn’t want them distributing bathing suits for adults for your brand. You may have other licensees in that vertical market. Similarly, if they only have a license to distribute in the United States, they should not be marketing your brand overseas.

[Read more: How to Protect Your Intellectual Property Overseas]

While these factors will be exclusive to each licensee, other elements of the licensing agreement will be the same across different agreements. If you have multiple licensees, it pays to set up licensee training that outlines proper use of your brand. You want to make sure that they are only depicting your brand in alignment with your brand guidelines, which means using the appropriate colors, fonts and positioning. And you want to make sure they are only using your brand name on products that are in alignment with your audience.

[Read more: Guide to Intellectual Property Rights]

Finally, you want to make sure that your licensees are doing everything they can to give your merchandise the best chance of sales success. Are they following the steps outlined in the business plan? Are they choosing the right distribution channels? Are they connecting with the proper audience?

Make the leap as a licensor

It’s important to have a team constantly reviewing the actions of licensees to be certain they are representing your brand in the best light. You also want to stay on top of licensees’ sales figures so you can be certain you’re receiving all the royalties you deserve. There is a lot of work that goes into licensing your brand, but the payoffs can be well worth it.

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.

Follow us on Instagram for more expert tips & business owners’ stories.

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.

Brought to you by
Simplify your startup’s finances with Mercury
Navigating the complex finances of a growing startup can be daunting. Mercury’s VP of Finance shares the seven areas to focus on, from day-to-day operations to measuring performance, and more.
Read the article