All you need to know about standard terms in a license agreement – Part 3
Still on important terms in a license agreement:
TERM
The length of the term of the agreement generally depends on the product category being licensed. Most standard product categories will require licenses with two full years of selling time, plus development period (prior to marketing date), so the average license will be around 27 to 30 months. If the proposed term is less than this, most licensees will pass, deeming it not enough time to earn back their investment and amortize fixed and manufacturing costs.
All you need to know about standard terms in a license agreement – Part 2
Other important terms in a license agreement include:
DISTRIBUTION CHANNELS
Most licensing agreements will list approved distribution channels that the licensed product can be sold through. This can tend to be fairly rote and a bit of an overreach on the part of the licensor, but what is generally important and legitimate is for the licensor to have reasonable control over the positioning of its brand in the market. If the licensor wants its brand to be in mid-tier and up, then it shouldn’t license the brand to a company that specializes in hypermarket distribution.
All you need to know about standard terms in a license agreement – Part I
As to other material terms in a standard licensing deal:
TERRITORY
Licensing Agreements are almost always defined by where a product is sold, rather than where it is made – so from a licensor’s perspective (whilst the two elements are equally important), they will probably want to confirm that the proposed licensee has excellent distribution into the Territory & relevant channels, and then looks at the licensee’s product quality, design capability and innovation.
Carrying on with what makes a ‘marketplace’ for licensing, it can be considered likewise from the licensee’s side: The licensor is ‘renting’ the awareness & popularity that a certain mark or brand has to help it sell products. Building a brand, and building consumer awareness around a brand, is a very costly, risky and time-consuming undertaking.
In the last post, I went over the overall structure of a standard licensing agreement. I’d like to write here about the topline rationale behind licensing – why and how the licensing model is a viable business approach for both licensors and licensees – in essence, what is the basis & parameters of the ‘marketplace’ for licensing.
The best way to get a big picture understanding of how licensing works is to use the analogy of real estate.
Let’s say you have a property company which owns a condo building, and is renting the units out to tenants. A real estate agent has been hired by the condo owner to find tenants. When the agent finds a tenant, that tenant will sign a contract for one or two years, agreeing to a certain financial arrangement between the tenant and the landlord, as well as how the condo unit can, and cannot, be used. The agent who brokered the deal is paid a commission by the landlord (typically), which is generally a percentage of the financial arrangement that has been agreed to by the tenant and landlord.