Beyond Short-Term Royalty Potential: Vetting Prospective Licensees for Long-Term Success

March 12, 2018 Licensing Comments (0) 406

Licensors often start their vetting process with a license application to learn about a prospective licensee’s proposed licensed product, the sales potential for the licensed product, and the underlying financial health of the licensee. This may be sufficient if the primary goal for a licensor is revenue generation; however, if the licensing strategy goes beyond royalty generation, a licensor will need to consider other factors to help ensure all parties have more significant opportunity for success in the licensing relationship.

A licensor who seeks to increase awareness of its brand, expand into new categories or markets, or develop new products to help serve its business goals, for example, may not consider short-term royalty potential as the primary factor in evaluating new licensees.

Depending on a licensor’s strategy, it might also incorporate factors into its review and vetting process to gain a broader view of a prospective licensee, its alignment with a licensor’s mission and vision, and potential for long-term growth. In such situations, a licensor’s vetting process might include the following:

  • Organizational Fit. A prospective licensee and the new licensed products it proposes must be a good fit with a licensor’s mission and vision. The proposed products, the manufacturing and sourcing procedures, and the marketing and merchandising strategies, must all be in alignment with a licensor’s brand, image, and organizational direction. The prospective licensor’s business practices, executive leadership, management, and customer service staff will likely have an impact on a licensor’s brand, and these factors should be considered in the evaluation of alignment with the licensor’s organization.
  • Operational Stability. Stability is essential, and some licensors assess stability by the number of years a prospective licensee has been in operation or the appearance of financial solvency; however, a more in-depth dive is always required. For example, a licensor will likely want to pull Dun & Bradstreet reports, ask for financial statements from non-public companies, check several references (other licensors, vendors, and manufacturers), and evaluate the leadership biographies for relevant experience. A licensor might also want to consider a prospective licensee’s operational structure and supply chain, paying particular attention to the ability to fulfill its marketing, sales, product delivery obligations in determining a potential licensee’s stability. In some cases, a licensor might also want to conduct a site visit to confirm its findings before issuing a license.
  • Expertise. Experience with the proposed licensed product and the specific market for that product is best, although not always essential. If a prospective licensee has strength in a product category or market, a licensor will likely benefit from that expertise. However, there are times when a prospective licensee has knowledge with similar products in the market and is looking to expansion opportunities. In these situations, a licensor will need to consider if the expertise in existing markets or with similar product-lines will translate well into the proposed expansion plans with the licensor’s brand.
  • True Opportunity. Opportunity for expansion into new categories and markets always should be considered, although carefully weighed against the risk to the brand. Prospective licensees rarely hit a home run with their first proposal to a licensor because they do not have a thorough understanding of the brand or a licensor’s strategy. It is up to a licensor to look for the “true” opportunity within the proposal, rather than just what is written specifically in the proposal.  A licensee may not have sufficient knowledge of what is possible when proposing a licensed product. However, if a prospective licensee is open to exploring how to create a better fit with a licensor’s needs, values, and expectations, a licensing partnership might evolve to maximize the opportunity for both parties.
  • Innovation and Creativity. Innovation and creativity may be the most critical factor when considering a prospective licensee’s proposal. Most licensors need progressive licensees—those who desire to go beyond placing a logo on an existing product in potential license’s current line. While there is a need in some categories for a product with a “logo slap,” a prospective licensee who demonstrates a commitment to developing new products or merchandising approaches that align with a licensor’s strategy, mission, or vision reflects a level of innovation and creativity that can create a valuable licensing partnership.
  • Commitment to Brand. Commitment to a licensor’s brand should be demonstrated through a prospective licensee’s product development plan, marketing plan, and merchandising approach. A financial commitment should be readily evident, but a licensor should also look for messaging alignment, documented product growth strategies, and of course, a passion for the brand.

One way for a licensor to build value is to use this approach to systematically identify and develop new opportunities beyond the obvious. In fact, a key strategy for growth brands should be to raise brand visibility in unexpected places.

Unexpected places
In fact, many excellent opportunities will come from distribution through unexpected places and proposals for such distribution warrant a much closer look.  This is particularly true when a brand is first launching a licensing program or when a licensor desires to connect with its core audience in a different market.

For example, in the case of one organization rebuilding its licensing program, a prospective licensee’s commitment to the brand and their creativity and innovation in design resulted in several solid concepts, which later became successful licensed products in consumer markets where the licensor’s presence was very unexpected. The success of these licensed products proved the value of the licensor’s brand in the consumer marketplace and was instrumental in helping the licensor re-launch its licensing program.

Better partners
Stable, innovative, and committed licensees who have a passion for a licensor’s brand are likely to be better partners and generate substantial revenue over time.

Some licensors may choose to focus primarily on new licensees who might generate higher royalty revenue for a short period, while others prefer the steady, long-term growth in royalty revenue.  For the latter, a vetting process designed to create stronger alignment with a licensor’s mission, vision, and long-term goals, ultimately provide greater success for the program and result in stronger, more prosperous licensing partnerships.

The six factors above will not ensure the long-term success of a licensee nor necessarily create a better licensing partner. However, considering those factors will help a licensor identify prospective licensees who are a better fit with the overall licensing strategy.

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A version of this post was originally published in the Licensing Industry Merchandiser’s Association (LIMA) Bottom Line newsletter.

David Harkins is a serial entrepreneur with significant experience in branding, strategy, licensing and marketing.

In his spare time, he consults, coaches, speaks, writes, hikes, explores, and creates art. Although, not necessarily in that order.

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Beyond Short-Term Royalty Potential: Vetting Prospective Licensees for Long-Term Success

by David Harkins time to read: 4 min
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