5 Ways to Evaluate a Potential Licensee

Licensing a company to expand your trademark into other product categories can be rewarding to your bottom line and strengthen your brand by adding millions of impressions in the marketplace. In the words of management guru, Peter Drucker, “All economic activity is by definition high risk.  And defending yesterday—that is, not innovating  [yes, licensing is innovation]  —is far more risky than making tomorrow.”

However, entrusting your brand to another company to be used on their products should not be taken lightly.  In my last post, I argued that evaluating a potential licensing partner is a balancing act of weighing the risks against the rewards, and I presented five (5) ways to evaluate a company as a potential licensee.  Here are five (5) more important points to consider when deciding to partner with a potential licensee:

1.      Potential Conflicts

Of course this is a big one for most companies—does this potential licensed product conflict with any of your core products and is there any concern about cannibalization of sales? If you already have this product in your core products, is there any reason you would want to divest and allow the potential licensee to take over the business?  Some companies have high thresholds to keep products in the market.  For example, some larger companies require sales of over $50 million in annual sales consistently over the years to capture ROI.  If not, they probably will discontinue.  Instead of doing so, they should consider divesting the activity, along with a licensing deal to continue the use of your name.  This is a perfect opportunity for a small to medium sized potential licensee, since $5-50 million would be a very attractive business for them.

Another reason to license to a company with a same or similar product is that they can expand your distribution channels and/or expand your footprint within the store.  P&G recently licensed its Febreze brand to MVP to take into the candle/décor aisle at mass and other retailers.  Walmart dedicated a large area for this launch in 2013.  This allowed P&G to continue its focus in the air care aisle.  Through licensing P&G was able to extend its brand to other aisles to ward off competitors and provide other types of candle scents and shapes to delight its consumers.

This probably goes without saying, but make sure that this potential license would not infringe on any other contracts within your company.

You also should make sure that you have your trademark registered in the category and if not, work with your legal to conduct a search and secure the registration.  This all can be done simultaneously with the negotiation of the contract.

2.      Highly Rated Insurance Provider

Ensure that your potential licensee is willing to carry ample amount of insurance with no lower than an “A” rated insurance company.  Your company will be named as an additional insured on the policy, so you want to make sure you are fully covered.

3.      Experience Working with Brands

It is always a plus if the potential licensee has a well-known brand of their own and they know how to treat valuable brands.  If they have other licenses in their portfolio, how have they treated those licenses?  Is the program successful and do they have quality products?  This will all come out in the reference checks recommended above.  You should also ask for samples to evaluate product quality and ensure that they have the ability to translate a brand’s equities well in their product categories.

4.      Marketability of Proposed Product

Most of all, you want to make sure the potential licensee is pursuing a product category makes sense for your brand and that it will sell to both retailers and consumers.  Does it fit the brand image? Even though it is not necessary, maybe they have validated the concept already with consumers.  Do you have any consumer research related to this category with your brand?

If they already have an interest from a retailer, that is a good sign of its marketability.  More and more, we here at IMC do not recommend deals to our clients unless the potential licensee can demonstrate retail demand.  We’ve also seen that many licensing ideas come directly from a retailer, which is probably the gold standard in terms of giving you confidence in the product’s marketability.

5. Size of Prize

Before starting any licensing program, you should decide what is most important—profitability or number of impressions in the market.  It is okay if it is both.  Remember that a highly success and profitable large program takes the same amount of work as a smaller program, so always consider the return on investment.  Keep in mind that number of impressions does have a value, too.