5 Ways to Evaluate a Potential Licensee
Jacky Kuerzi
September 17, 2024
Utilizing licensing 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. However, entrusting your brand to another company to be used on their products certainly carries risk. Evaluating a potential licensing partner is a balancing act of weighing those risks against the rewards. Here are five important points to consider when thoroughly qualifying a potential licensee.
1. Experience Working With Brands
Does the potential licensee have experience working with established brands? Perhaps they are a master licensee with several brands, offering buyers an array of price points for retail. If they do have other licenses in their portfolio, how are they treating them? Are those programs successful? Don’t be afraid to ask for references and ask direct questions regarding their experience working with the licensee. The potential licensee may also have a well-known brand of their own. If this is the case, consider how they will position your brand against theirs when pitching to customers.
2. Sophistication of Manufacturing and Quality Control
Does the potential licensee have their own manufacturing facilities, or do they use a third-party manufacturer? If they manufacture themselves, be sure to ask where their facilities are located, how long they have been active, and have they been audited. The licensee should also provide their quality control processes and standards. Have they ever had a product recalled? And if so, what corrective action plan was put in place?
3. Sales and Distribution Evaluation
While qualifying a licensee, a comprehensive evaluation of their sales and distribution capabilities is essential. They could have a fantastic product, but it will fail if it does not reach the right consumers. How are their sales teams structured? Will they sell direct, or perhaps employ a distributor? Who do they include in their top five targeted customers? And once product is sold, how does inventory get from the manufacturing facility to the consumer? Does their distribution reach North America only, or do they have international capabilities? What does distribution look like on other products they manufacture?
4. Marketability of Proposed Product
Speaking of the go-to-market strategy, a potential licensee should develop a marketing strategy for the program. Ask what advertising and/or promotional support they traditionally allocate resources to. What initiatives would they execute to launch and sustain the growth of the licensed products, and what is the budget for these expenses? How do they develop packaging and marketing materials? Also, this is an area where a licensee and licensor have an opportunity to collaborate. Be prepared to answer questions the potential licensee may have regarding your willingness to work together here.
5. Financial Commitment to Program
Lastly, a good indicator of how successful a licensing program can be is the size of the financial commitment from the licensee. What is their vision for the scope of the program? Ask for wholesale projections for the first five years, understanding this will likely be a build for at least the first three years. Then, considering the projections, what is their financial commitment to the licensor, the proposed Guaranteed Minimum Royalties? Typically, IMC asks licenses to guarantee 50% of the projected royalty revenue. And because there is a build in the first few years, is the licensee willing to provide an advance? These financial commitments are not only helpful to understand the size of the prize for the licensor, but they also prove to the licensor that they have “skin in the game” and the mutual desire for the program’s success.
Conclusion
In conclusion, evaluating a potential licensee is a considerable process, but one that is crucial to finding the right fit for your brand. If you are a brand owner and thinking about exploring licensing, we’d love to help! Licensee prospecting and qualification is just one of many services IMC offers. Let’s talk!
