Licensors with iconic brands often have to make tough choices about extending their brands in new markets through licensing versus keeping the flexibility to enter market categories and offer products that are competitive with a licensee’s offering.
Simlarly, licensees (the company with the product but not the name) can be reluctant to enter into licensing partnerships when the licensor can become their competitor in as short as a 1-3 year time frame. They are making substantial investments in product development, marketing and distribution for a new product or program, and they don’t want to see their hard work turned against them.
The right deal can address everybody’s concerns by keeping options open.
Imagine there is a small company called SnackCorp and they’ve developed a recipe for an amazing S’more cookie. SnackCorp knows they lack the brand awareness to succeed on their own and what they need is a household brand name to attach to their product.
Here’s where the Stay Puft Marshmallow Corporation, a household brand name since the 1980’s, comes in. In this example, Stay Puft has been trying to develop a S’more cookie for years but they are still at least three years away from succeeding and are willing to license a similar quality product until they do. What should they do?
Definitely, they should proceed, but keep their options open with a licensing deal with two components.
The first component should allow SnackCorp to recoup some or all of its product development and marketing investment in the event the Stay Puft makes a great S’more cookie down the road and decides to become a competitor. This is called a (“Recoupment Provision”) and has many different approaches, including:
- A lump sum payment of the investment (SnackCorp would need to document their investment)
- Through the repayment of royalties paid to date; or
- Another similar approach that allows the licensee to recoup some or all of their investment
The second component should provide Stay Puft Marshmallow Corporation the preemptive right to, at its discretion, pursue a buyout option (“Buyout Provision”) relating to SnackCorp’s product or even its overall company. The Buyout Provision could be achieved through a number of different approaches including:
- A supply/sourcing contract for a time frame or dollar amount to be determined, or pre-determined;
- Purchase the licensed product business from SnackCorp (with or without pre-negotiated terms); or
- Purchase SnackCorp outright (with or without pre-negotiated terms).
With this kind of proactive deal structuring, licensees like SnackCorp can make a significant investment to get their product off the ground, and pay meaningful returns to licensors like Stay Puft while everyone keeps their options open.