What is licensing?
Licensing is the act of leasing the rights to a trademarked and/or copyrighted entity (the property) for use in conjunction with products or services. The owner of the rights is known as the licensor; the licensee rents the rights from the licensor.

How do you pay for a license?
The primary form of payment for a retail licensing agreement is a royalty, or a percentage of the manufacturer’s net sales price on each unit sold. The licensee also pays the licensor a minimum guaranteed royalty (against actual royalties), a portion of which is due as an advance. There are many variations on this basic structure.

What is the average royalty, advance and guarantee?
It is somewhat misleading to discuss an average payment for licensing deals, since they vary widely depending on a number of factors. While royalties are commonly in the 5%-14% bracket, they can be as low as 1% and as high as 20%. Increasingly, licensors and licensees are agreeing to a graduated royalty scale tied to performance or sales benchmarks. The majority of guarantees fall between $10,000 and $50,000, but they can range from as low as $1,000 (or less) to tens of millions of  dollars. Advances also vary.

What are the risks of licensing?
For the licensor, the most significant risk of a licensing program is the threat of losing control over the property. For the licensee, the major risk is financial loss, since minimum guaranteed royalties and investments in product development and tooling become sunk costs if the property fails.

What are the responsibilities of the licensor and the licensee?
In general, the licensor is responsible for maintaining the value of the property, by adequately protecting it through legal channels, keeping it fresh and desirable and monitoring and counteracting infringement. The licensor also provides marketing support. The licensee is responsible for manufacturing, marketing and selling the licensed product line. Licensees are often responsible for product development (subject to the licensor’s approval), but some licensors actively develop products in-house.

How do I forecast the financial impact of licensing on my business?
The financial impact of licensing is difficult to predict. For licensors, one method is to examine comparable properties and assess the relative strength of the licensor’s property versus the others over time (an inexact science at best). Licensees should consider whether their company can easily withstand a worst-case scenario, analyze the license’s effect on margins and examine whether other marketing methods may achieve the same volume increases at less cost.

Who initiates the licensing agreement?
Either the licensee or the licensor can make the first contact. Licensors usually offer a contract to the licensee (except in certain industries, such as publishing); it is virtually always negotiable.

How big a problem is counterfeiting?
Counterfeiting is a huge challenge, requiring significant human and financial resources to combat. The more popular a property, the more counterfeiting activity occurs.

What are net sales?
Net sales are usually defined as the manufacturer’s selling price (as stated on the invoice), less certain allowable deductions (e.g., freight, cash/volume discounts, returns). Deductions are normally limited to 2%-3% of the invoice amount.

What is the difference between a copyright and a trademark?
Trademark registration is the primary tool for legally protecting a property for purposes of commercial exploitation. U.S. trademarks can be renewed indefinitely if the marks in question continue to be used commercially. For maximum protection, properties should be registered separately in each relevant product classification in each country where they will be licensed or where infringement is likely to occur. Names, graphics and other elements that serve to differentiate one product line from another can be registered as trademarks. Copyright is an automatic right that begins with the creation of a work of art, literature or music; it expires 70 years after the death of the creator. Registration in the U.S. is effective virtually worldwide and is suggested but not required for full protection. For most retail product licensing, copyrights are a secondary method of protecting logos and character designs. Full legal protection is expensive; licensors need to weigh the costs and benefits of multiple registrations in an effort to maximize protection while keeping costs within budgetary constraints.

Can I use a property that is in the public domain for free? What does it mean when the property is in the public domain?
A public domain work is, in effect, owned by the public and can thus be commercially exploited by anyone. Public domain properties are generally copyrighted properties that have expired or trademarked properties that have gone into the public domain through the trademark owner’s lack of vigilance. Government-sponsored or public events are also in the public domain, although specific logos relating to them are trademarked. Anyone can use a public-domain property, assuming that the user can gain access to reproducible depictions of it.

How is compensation structured for promotional licensing?
Compensation for promotions ranges from a flat fee (such as for advertising or endorsements), to a percentage of a media buy (such as for advertising usage), to a percentage of merchandise, food or ticket sales (such as for licensed restaurants, arcades, live event appearances), to no cash at all. A licensee may provide valuable promotional elements in lieu of some or all of a cash payment. The possibilities vary widely depending on the situation and the final package can be complex.

How is compensation structured for a service-related licensing agreement?
Compensation varies depending on what type of service is being authorized, but usually consists of a percentage of sales (for memberships, class enrollments, trip bookings, etc.) and/or merchandise sales, if applicable (e.g. for books or travel-related gear), as well as a fee for the license. Other payments also may be factored in.

What is a central marketing fund?
A central marketing fund (CMF) is a pool of money generated by a percentage of each licensee’s sales (usually two to three percentage points on top of the royalty), with matching funds supplied by the licensor. The fund is controlled by the licensor and is used to put together and finance promotional activity that benefits the property and its licensees.

Are licensing deals negotiable?
Yes, all licensing deals—including nearly every component of the deal, from compensation to marketing support—are negotiable, although those involving large licensors and/or in-demand properties may be less so than those involving more competitive properties or licensors with less bargaining clout.

How are licensing agents compensated?
Licensors generally pay their licensing agents a commission, often 35%-40% of all licensing revenues. This commission can be higher or lower, depending on the specifics of the situation. Some agents also charge monthly retainers, especially in the corporate sector.

What is the step-by-step procedure for setting up a licensing program?
There is really no step-by-step procedure, since every licensing program is unique. All licensors should know their objectives for the licensing effort and the characteristics of their property and its target audience before setting up a strategy. Strategic considerations include which product categories to select, which distribution channels and geographic territories to target, how much to require as payment, when to launch the program and how fast to roll it out.

Do I get to approve products made by my licensees?
Yes. In fact, the product approval process — along with the licensee selection process — is the most important way to maintain control over the program and the property’s image.

How do I sell my property to licensees and retailers?
The more concrete information you can provide them, the better. Effective sales tools include marketing data (such as sales figures, viewership, attendance numbers, etc.); information about the property itself (style guide and other art reference, story boards, character synopses, information about how consumers perceive the brand, etc.); data about the target audience; and examples of the property’s potential application on merchandise.

How do I decide which licensees to sign?
Selection criteria include the licensee’s existing retail customer base, what the licensee is willing to pay, the financial strength of the company, the design and quality of the licensee’s products, etc. The relative importance of these criteria depends on the licensor’s objectives. See Chapter 5.

How do I decide if I should use a licensing agent?
Licensing agents offer expertise and licensing contacts to companies who lack in-house personnel with the same experience. Financial considerations also play a role: At what point does the agent’s commission exceed what an in-house licensing department would cost?

How do I find a licensing agent?
Licensing agents are listed in a number of directories, including those published by EPM Communcations. Choosing an agent requires consideration of several factors, including the agency’s specialty, track record, clients (and references from clients), plans for the property in question and proposed financial package.

How do I prevent counterfeiting?
Licensors can take a number of steps to attempt to prevent counterfeiting, including educating licensees, retailers, consumers and potential counterfeiters on what counterfeiting is and what the penalties are; creating consistent product packaging and labeling to make spotting counterfeit merchandise easier; and encouraging licensees, licensors and retailers to report incidences of counterfeiting.

What should be included in the style guide?
Style guides can be published in print or electronic form and contain designs available for use by licensees (and possible variations on those designs) each season, as well as specifications on the proper depictions of logos, characters and other elements of the property. It also describes required details to be used on packaging and labeling and specifies how copyright and trademark notices must be marked.

What staffing do I need to oversee my licensing program?
Staffing varies from company to company depending on the property type, the scope of the licensing program, whether or not an agent is involved, and the number of properties licensed. Artists or other entrepreneurs often handle licensing themselves or with a business partner, corporate licensors may have departments ranging from one to 10 people dedicated to licensing and studios may have dozens (a rare few have 100 or more). Most observers recommend having at least one person dedicated to licensing full time, but even this rule may not apply in all cases.

How do I decide which properties I should acquire?
The best property for a particular licensee will be one where the licensor’s goals and target audience match the licensee’s and where the fit between the property and product is appropriate. A number of properties may work for a given licensee, depending on its objectives and product line.

Where do I find out about properties that are available and who owns them?
Trade publications, trade shows and directories of the licensing business are all good sources of information. In addition, licensees can hire a licensing consultant(s) to be their eyes and ears in the licensing business.

If I am a small manufacturer with no prior experience in licensing, can I become a licensee?
Yes, although it may not be easy. Opportunities exist for licensees who have expertise in a certain niche distribution channel, who have an idea for a unique licensed product or, sometimes, who are willing to commit to an unproven license in its early stages.

What do I have to do to become a licensee?
Licensors usually require licensees to fill out evaluation forms. They ask for the licensee’s plans for the licensed product line, historical data about the licensee’s business, financial status of the licensee, and retail and credit references. In addition, they want to see samples of products similar to those the licensee proposes to sell under the license.

Is there anything like a licensing agent that represents the interests of manufacturers?
Yes. There are a number of licensing consultants who exclusively represent the interests of licensees in seeking appropriate properties to acquire.

If I license a film or TV show, do I automatically get to use actors’ likenesses or the movie soundtrack?
Not necessarily. Licensees should find out upfront if the use of an actor’s likeness is allowed. Even if it is possible contractually, there may be problems if the actor is not fully behind the project; studios will not alienate the talent by siding with licensees. The licensor may not own rights to the music associated with a property either, but can direct you on who to approach.