“I want our products to be everywhere at once. But I don’t have the time, manufacturing capabilities, or team to make that happen.”
That’s a thought process running through many business owners’ minds. They know they want to expand into new markets, develop new product lines, and diversify their income streams. The only problem? Lack of resources.
Brand licensing exists to solve that issue. It happens when a company grants permission for other businesses to commercially use their intellectual property—be that their brand name, software, or patent—in return for royalties.
If you’re unsure whether brand licensing is right for your business, this guide is for you. We’ll walk through the types of deals you can broker, the benefit of licensing your intellectual property, and examples of brands who’ve successfully licensed their products.
Table of Contents
What is brand licensing?
Brand licensing is the act of giving permission for another company to use your business’s intellectual property (IP).
Brand owners lease their patents, software, or characters to other companies. Licensees can re-sell the IP at a higher price or manufacture merchandise with the IP on it. Either way, the licensor gets a kickback—as a percentage commission or a one-time fee—as a thanks for granting permission.
One famous example of a brand licensing deal is McDonald’s. Its infamous Happy Meal boxes contain miniature toys of whichever movie is out in theatres that month—from Trolls to Fast and Furious. McDonald’s gets a licensing agreement from the creator of those movies. It gives the fast food brand permission to manufacture those characters for their Happy Meal boxes.
5 types of licensing deals
Brand and trademark
Businesses can own the rights to use a brand name or logo. These are called trademarks, and exist to prevent other companies from using a company’s assets. Customers know if they’re buying from a brand with a trademark, they’re the real deal.
Companies can give licenses for other brands to use their trademarks. Take Coca-Cola for example. Independent brands who manufacture the fizzy drink on behalf of Coca-Cola can do so because they have a trademark license. These partnerships drive upwards of $1 billion in retail sales for the mega brand.
A patent is similar to a trademark in the fact that it’s intellectual property legally protected from unauthorized commercial use. The only difference is that patents are given to new inventions, not brand names or logos.
Patents can be awarded for new machinery, design (consumer product), or plant inventions. Take Lollacup for example. Anyone who wants to use its weighted children's sippy cup needs a patent license from the brand.
Character, entertainment, and art
Characters are another type of trademark that brands can license. The most obvious example? Disney. You’ll find Mickey Mouse, Marvel, and Star Wars characters on merchandise all over the world—not just official Disney stores. Third-party brands get a license to use Disney’s characters on their clothes, home decor, and mugs.
These trademarks pass over into entertainment. Disney also licenses its movies, TV shows, and music. Even footage of its theme parks can only be used by those with a brand license.
If you’re paying to use a software, you’re buying a single-user or team license. You’re not allowed to sell access to the software to anyone else—unless you have a multi-user license. This allows third-party companies to re-sell a software company’s code to other people.
The licensed sports merchandise market is big business. It reached a value of $30 billion in 2020 according to the Global Licensing Group—a figure predicted to grow at a compounding annual growth rate of 5% through 2026.
Sports teams in the NBA, NFL, and European soccer leagues all broker brand licensing deals. Each agreement allows third-party companies to produce merchandise with the team’s logo or player name. Soccer team Manchester United, for example, makes more than $115 million from licensing agreements every year.
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The benefits of licensing your brand
Grow your brand and reach a wider audience
Licensing your brand essentially means forging a partnership with another business. One of the main benefits of these partnerships is being able to reach a wider audience.
Working with another brand gives you instant access to their customers and audience and vice versa. Whether you’re the licensor or the licensee, both brands lend each other their audiences to grow and expand into a new age demographic, geographic location… you name it. Market penetration is easier when you’re working with licensees who’re already established there.
Build stronger relationships with customers
As your brand grows, your customers’ desires and expectations grow with it. No matter the size of your company, it can be hard to grow a product lineup in a meaningful way that keeps pace with those customer expectations.
Licensing your brand is one way to build bridges between your manufacturing and product design capabilities. The end result? Driving repeat sales and delivering the products your customers are looking for.
The licensed product definitely spreads faster on social media. And when people buy it, they love sharing it. That's a huge part about our businesses and our positioning: we're fun. It makes a lot of sense when we do fun licenses because it puts smiles on people's faces and they love showing off their coolers.
Generate incremental revenue and diversify your revenue
With a brand licensing agreement, and as the licensor, you’ll typically receive royalties for every licensed product sold. Royalties aren’t typically going to take your business from $1,000 in revenue to $1 million, but they can be a good way to add incremental value and diversify the ways your brand can make money.
Depending on the licensed product, that incremental revenue can even help to smooth out seasonal swings in your retail store.
Protect your brand against counterfeit products
If you’ve ever been to a public market, you’ve probably seen unlicensed and counterfeit products being sold illegally. Think of those $20 “Coach” handbags or $10 “Ray-Ban” sunglasses.
When a brand gets big enough, counterfeiters are never far behind. Clothing businesses are most affected by rip-offs, with apparel brands losing out on €26.3 billion in sales ($30.5B) each year because of counterfeit products.
Licensing your brand can help you stay ahead of this curve. One of the first stages of the brand licensing process is to protect your intellectual property. It also protects your brand’s prestige with explicit terms around discounting and similar issues.
This proactiveness means your brand has a leg to stand on when battling counterfeit products.
Experiment with new product categories
Breaking into a new market is risky. Sure, you can do product research, listen to customers, and keep an eye on what competitors are doing. But you never truly know whether investing in a new product will pay off until you do it.
Tanner Arnold, the President and CEO of Revelation Machinery, argues that brand licensing deals make this less risky: “On the one hand, well-established businesses have access to finance, expertise, and experience in an already established market.
“On the other hand, as a startup company, you'll need to either seek outside funding or put your own money into product development. This can take a lot of time and money, and it can also be dangerous.”
Tanner says, “A giant, more profitable corporation will be able to manufacture in larger quantities and advertise your product to a much larger audience—something smaller, independent businesses are unable to achieve.”
Lean on manufacturing or distribution resources
One of the hardest things about growing a retail business is manufacturing. You can drive customers to your store or ecommerce website, but as soon as they get there, you need the manufacturing process to run smoothly. Otherwise, those potential customers leave empty handed.
According to Gerrid Smith, Chief Marketing Officer at Joy Organics, brand licensing makes this easier: “Working with a licensor or licensee who has established manufacturing and/or distribution facilities and experience may allow you to take advantage of these resources.
“This could shorten your time to market and save you money and time by eliminating the need to set up a production facility, for example. By sharing common costs like promotional and advertising efforts, both the licensor and the licensee may be able to save money and gain efficiencies.”
How to license your brand
An effective brand licensing strategy ensures that your brand’s assets are safe and protected, and that any licenses you hand out will ultimately benefit your brand. Here’s how to get started.
1. Protect your intellectual property
Protecting your intellectual property (IP) is one of the most important factors behind licensing your brand. The last thing you want is to accidentally give someone full, unfettered access to your brand assets without getting anything in return.
If that sounds crazy, consider Dale Earnhardt Jr. who, for years, didn’t own the license to his own name. Or the creators of Superman, who sold 100% of the rights to the character for a measly $130. Or The Beatles, who sold off 90% of the rights to their likenesses.
Think about all the products you’ve seen with those iconic bowl haircuts, and then imagine The Beatles themselves only seeing 10% of the royalties.
The best way to protect your brand is to work directly with a lawyer who specializes in intellectual property—and to get started early. Ensure your brand’s assets are trademarked and protected from the very outset. Then you can think about licensing them down the line.
2. Do your research
Licensing your brand isn’t a one-and-done process. If you’re looking to aggressively pursue brand licensing as a growth engine for your retail business, it’s best to create an overarching strategy that outlines what you’re looking for in a potential licensee. That way, you can make a quick decision about which companies to approach and approve.
It all starts with extensive research. Like any partnership, you’ll evaluate potential licensees to ensure they’re a good fit for licensing your brand. There are a ton of factors that go into brand fit, but let’s boil it down to a few questions you should consider:
- Are your customers interested in this product? If customers frequently ask if you offer a product (and you don’t), that’s a good opportunity to offer someone else a license to produce that product under your brand name.
- Does your brand’s equity translate to this product? Sports teams license their logos and names to apparel companies because fans snap up Red Sox hats like there’s no tomorrow. That fits. It wouldn’t make quite as much sense for Tampax to license their brand to a company that makes breakfast cereal.
- Does the licensee have the operational capacity to add value? You gain the most from brand licensing agreements when the licensed products sell (a lot.) For any potential licensee, ask yourself: Can they produce enough of the licensed product to make the agreement lucrative?
3. Set terms and restrictions
Once you’ve found a potential licensee who’s a good fit for your brand and customers, it’s time to draft the licensing contract. As we just touched upon, you should work with a licensing agent or attorney to help ensure your contract includes all the necessary terms and that the agreement is legally binding.
As your agent draws up the license, there are several terms and restrictions you’ll decide on. These lay out the specifics of the partnership and set expectations for both you and the licensee.
How to create a brand licensing agreement
A brand licensing agreement accounts for every detail involved in how two companies will work together. For example, the licensee (the company buying rights to license a brand) often pays a portion of each sale of the licensed product back to the licensor (the brand being licensed.)
So, what do these brand licensing contracts look like in non-technical terms? And how do you make sure you’re creating one that’s mutually beneficial for both parties? Here are nine things to consider.
Work with a lawyer
Nobody knows the nuts of bolts of a watertight agreement like a brand licensing lawyer.
Do a Google search to find lawyers experienced with your type of intellectual property—such as patent or software law—as well as your industry. Ask previous clients for reviews. Read case studies of deals they’ve brokered. Make sure you’re clear on what fee they’ll take from the deal before signing on the dotted line.
It’ll take some time to find a lawyer who will make your brand licensing deal fair for everyone involved, but it’s the most important part.
Define the intellectual property being licensed
Alongside clearly defined roles for both the licensee and licensor, your brand licensing agreement should clearly define what is (and isn’t) included as part of the agreement.
Sanshee is a retail business that manufactures premium merchandise for video game and anime fans. According to Sarah Fetter, the operating manager who brokers its licensing deals, “[You need to specify] licenser deliverables, things like we agree to promote the item that you’ve created for us within X amount of time. All of that spelled out in advance is such an amazing thing to have.
“And then, having a full suite of just all of the assets that I could ever hope for, whether it’s a copy of the game or backgrounds on the characters if it’s not out already; any of the artistic stuff or character items… Basically, any of that stuff that we need to know [should be] there on the day that we sign the license.”
The vast majority of brand licensing agreements are non-exclusive. That means you can license your brand to as many competing apparel manufacturers as you choose. Even though non-exclusivity is the norm in brand licensing, it still needs to be outlined in the contract.
In some cases, you may choose to offer a small number of exclusive licenses. Fewer licensees exclusively using your intellectual property gives them a competitive advantage—in which case, you can typically command higher royalties.
Exclusive means that if I sign an exclusive contract with an IP holder, we have the sole ability to create items. Non-exclusive is going to mean that we are working in conjunction with other companies. For example, we might be making plushies at the same time as another company is making t-shirts.
One of the biggest benefits of licensing your brand is the extra stream of revenue you build. Licensees make money off the back of your intellectual property. So, in your brand licensing agreement, go into extensive detail on the structure of your financial compensation for licensing your business’ IP.
Some common payment structures for brand licensing deals are:
- Initial flat fee. Licensees pay an upfront, flat fee to license your IP. This is typically on a yearly basis.
- Ongoing royalties. Licensees will pay a set percentage of unit price or specific dollar amount for each licensed product sold. If you’re claiming a 10% royalty on licensed products and your licensee sells $500,000 worth, your cheque would be $50,000.
Some brands also choose to include sales monitoring as part of their agreement. In this case, the licensor can request sales data from the licensee to check whether the partnership makes commercial sense to continue.
Conversations around discounting licensed products may also arise throughout this process, especially using the royalty payment structure. In your licensing agreement, clearly state the maximum discount your licensees can offer to their customers. After all, a 10% royalty from a $50 full-price licensed product is dramatically different from a $20 discounted one.
When you give another company permission to use your name, logo, or likeness on their products, you’re taking a calculated risk.
Your brand is automatically associated with—and to some extent, held accountable for—the quality and content of those products. That’s why it’s vital to include quality assurance terms in your licensing agreement. Your brand identity and reputation are at stake.
Quality assurances might include restrictions for the licensee around:
- Distort images (like your brand logo)
- Changing your brand fonts or colors
- Adding new code to the licensed software
To protect your brand image, in your agreement, clearly define what is being licensed (i.e. a video game character) and any restrictions on how a licensee can use it. For example, “Licensee cannot use our IP to manufacture or sell alcohol-related products.”
Any co-branding agreement should be thoroughly considered (e.g. are the brands a good fit) and prepared to ensure that all parties are aware of their respective duties in order to avoid complications, such as brand reputation damage.
How long are you granting the license for another business to use your intellectual property? Sanshee’s Sarah Fetter likes to go for a year or two. It gives her time to assess the popularity of a licensed product before investing in a longer term deal.
However, there is no ideal duration for a licensing agreement. A year is a good starting point, but certain brands like long-term partnerships so they have more time to sell their licensed inventory. Others dipping their toe into the licensing waters might opt for short-term deals to see whether it’s a business model that works for them.
The length doesn’t matter so much. What does matter is including your agreed timeframe in your brand licensing contract.
If you’re working with several licensing partners, clearly define the regions they’re allowed to use your IP in. It’ll prevent them from competing with one another and causing arguments.
Sarah Fetter, who enters these geographically-restricted agreements as a licensee, says, “With any client that’s outside of the U.S., you generally can’t sell those items in the countries where the IP is held. So, if a person in England is making a game and we sign a contract with them, 95% of the time, we aren’t going to be able to sell in that country because they already have somebody who’s doing it locally.”
Sarah also adds that certain countries’ mail systems also play a role in agreeing on geographic regions: “In some cases, some of the clients will ask us not to sell in certain small countries because the actual process of dealing with shipping to… we’ll say Singapore. I have a friend who lives there and she can just never get anything. She has to use a mail forwarding service.
“Sometimes clients will ask you not to sell in those countries because you spend so much time trying to make sure that you get their items.”
Consider shipping responsibilities in your brand licensing agreement. Who will be responsible for picking, packing, and shipping an item to a customer? Where will the inventory be held: at your warehouse, the licensee’s, or a third-party logistics (3PL) partner’s distribution center?
According to Sanshee’s Sarah Fetter, ideal terms look like this: “We are going to send you X amount of items to send them to this location and that’s it. That is an ideal situation because when you get into importing and specifications and requirements it becomes really complicated, especially when you’re trying to do fulfillment.”
Every contract must have a termination clause that explains:
- When the licensing agreement ends
- How either party can end the contract prematurely
- The notice required to do so
You should also explain whether the brand licensing deal auto-renews after time is up—and if so, at what price. If you’re entering into a two-year contract with a licensee, for example, you may have a clause stating that if the deal is automatically renewed, your royalty fee increases from 10% to 12% of all licensed product sales.
Examples of licensing agreements
The Walt Disney Company
When your niece’s birthday is coming up, you don’t have to go far to find a gift with a Minnie Mouse screen printed on it. Why is that? Why are some brands so ubiquitous and easy to find? The answer is brand licensing. Disney doesn’t manufacture every T-shirt or coffee mug with one of their characters on it.
Since the empire signed its first licensing agreement back in 1933, thousands of other businesses signed licensing deals with Disney for the right to use their characters, series names, music, and other trademarks. Those businesses handle the nitty gritty details, like producing and manufacturing those products.
These licensing deals are why Disney seems to be everywhere. They’re the top licensor in the world, with licensees and DTC sales netting the company $54 billion every year.
Netflix is the biggest streaming platform in the world. Almost 74 million customers pay for access to its on-demand library of content. But not everything uploaded to the Netflix dashboard is produced and owned by the brand.
Netflix licenses movies, TV series, and documentaries from third-party production companies. It enters into (and renews) licensing program agreements granting them permission to show a production company’s content to their customers, based on the following criteria:
- Are the rights to the title still available?
- How popular is it, and how much does it cost?
- Seasonal and regional factors
The Moomins are a fictional family of hippopotamus characters created by Tove Jansson. You’ll find them in children’s books and comics in Swedish-speaking countries.
The Moomin Shop sells its own merchandise directly to customers. It also has a network of brand licensees using its characters. An example of this is the brand’s #OurSea, a nonprofit that collects money for the John Nurminen Foundation to clean the polluted Baltic Sea.
“It came about as a brainchild of the CEO of Moomin Characters at a dinner he had with a member of the foundation. It didn't take us more than maybe a month,” Moomin’s head of digital, Jonas Forth, says. “Then we had 50 people, licensees, large corporations, various partners sitting at the same table, coming up with ideas on what it should be.”
“It went live about one and a half years later, as one of the largest fundraising campaigns ever done in Finland. We're well on our way to collecting the money for the cause,” Jonas says.
Leverage brand licensing for your store
You don’t have to have a character as famous as Mickey Mouse to get involved with brand licensing. Sharing intellectual property for commercial use is a possibility for any brand—either as the licensee or the licensor.
Use these tips to make sure your licensing agreement is watertight. Define the financial kickbacks, quality assurance processes, and have restrictions on how a licensee can use your IP—especially considering your brand identity will be merged with theirs.
It might sound like a lot to work through, but a brand licensing attorney will make sure your agreement is watertight.
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