In today’s cut-throat business environment, it is not unusual to find companies negotiating licensing deals with other firms that never fail to include a multitude of business terms. They often bring in experts and lawyers to assist in such negotiations.
They may also use sophisticated commercial software to monitor their competitors’ activities, manage and control revenues and expenses, extract reports from business partners, etc. However, if you are an entrepreneur working from home or a small-business owner with limited capital resources and constraints on hiring staff and resources for this task, you would need experts’ help in negotiating highly competitive license deals.
The following tips will help you secure a licensing deal that meets the expectations of each party involved.
What Is a Licensing Deal?
A licensing deal is a contract between the owner of a property and a licensee who wants to use the property. The owner of the property, known as the licensor, grants the licensee (the party that makes use of the licensed material) rights to use it in exchange for a fee.
When negotiating a licensing deal with an owner who owns the intellectual property—a book, movie script, or other written work protected under copyright law—it’s essential to protect both parties’ interests.
When Would Someone Use a Licensing Deal?
Licensing deals are an option for businesses that want to sell their products or services but don’t have the resources and skills necessary to bring those products to market. Many entrepreneurs start out this way, finding a company that already has a steady customer base and can help them get their product off the ground.
If you’re looking for help to get your business off the ground and reach new markets, consider using licensing deals to leverage someone else’s brand recognition.
Others choose licensing deals when they want access to other intellectual property (IP). This is especially true in creative industries; if you want to use another company’s IP to create something new, then licensing deals will give you the opportunity that no other method offers.
Tips for Negotiating a Licensing Deal
Negotiating a licensing deal can be tricky and time-consuming, but it doesn’t have to be. Here are some tips on how to get started:
- The license agreement must be a win-win for both sides, or it will not work.
The licensee must be able to make money from the license, and the licensor must be able to make money from it as well. This is where you need to determine how much profit your product will make on a per-item basis.
You also need to figure out how much of a royalty you want and what percentage of rights you’re willing to give up for that royalty. If your licensing deal isn’t fair to both parties, then nobody will benefit from the licensing agreement.
- The more you don’t need to do the deal, the more leverage you have when negotiating it.
If you don’t need to make a licensing deal, then your brand has much more leverage in negotiations with prospective licensors than it does if you are desperate for one. The less desperate and the more options available in terms of other partners, the better off your company will be in this negotiation process.
Why? This is because when a company is desperate for something, its bargaining position is weaker since it will have no choice but to accept any terms offered by the other party (licensors). If, on the other hand, a company has no need for anything but wants an opportunity to grow its brand awareness through licensing agreements with third parties, then its only reason would be based on good business practices rather than out of need.
This allows them greater freedom when negotiating deals involving brands, products (like inventory), or services that would otherwise seem unattractive under normal circumstances, simply because there aren’t enough other alternatives available.
- If your sales channel is on the Internet, you have global rights.
If your sales channel is the Internet, you have global rights. If a company wants to sell your product in a specific country or region, they can’t do it without paying you a licensing fee. This is great because it means that your company will have a strong online aspect.
If you’re able to scale globally, you can get more money out of the deal than if you were only working with individual countries. Because digital products are easier to distribute globally than physical ones, the trend toward global licensing is growing stronger every year. If this trend continues to grow at its current rate, we’ll eventually see most products released into one or more international markets simultaneously.
- Givers get: if you give exclusivity, you should get a higher royalty.
In negotiations, it’s a good idea to think about the trade-offs involved in giving up something. For example, if you give up exclusivity, the other party should compensate you with a higher royalty rate.
The same goes for territorial rights and periods. Negotiation experts say that your royalties should increase accordingly if you give up any of these things.
- Don’t enter into a license without an exit strategy.
You want to make sure you can get out of the deal if it isn’t working or if your licensee is not doing what they are supposed to do. Make sure that you structure the license agreement so that you can terminate the contract if it becomes necessary.
It is also essential to consider whether you can get out of a licensing arrangement if there are problems with your licensee’s performance. For example, if a licensee cannot pay royalties as required by their agreement, this may be grounds for terminating the license. If you have signed a non-compete clause, you might also use this as a justification for terminating such agreements in certain circumstances.
- There is no one magic royalty number, whatever the deal.
When it comes to royalties, there is no one magic number. The royalty rate is based on the type of license and customer, as well as other factors. For example, if you have a product with a long shelf life and can be sold to multiple customers over time—such as books or music—you will probably be able to negotiate higher royalties with the other party than if you were selling seasonal items.
- Set a royalty by determining what licensees pay in comparable deals.
It’s essential to set a royalty by determining what licensees pay in comparable deals. To do this, you should look at other deals in your industry, as well as deals in other industries that are similar to yours.
It’s also beneficial to look at deals that differ from yours—this will help you determine how much more or less than the industry standard your royalty should be at. Finally, consider deals similar to yours but have different royalties—what percentage of net revenues does each deal capture?
- The term of the license should allow the licensee a reasonable time to recoup its investment in the deal.
The term of the license should allow the licensee a reasonable time to recoup its investment in the deal. Both parties need to agree on a realistic target for when a licensee will be able to recoup its investment.
This is especially true if you are looking at an upfront payment from your licensee, because then you want to know how long it will take for more money to come.
- Negotiate with a view to building trust.
Negotiating is all about building trust. If you can’t be honest with the other party, it’s doubtful they’ll want to work with you in the future. Make sure you’re upfront about your objectives, strengths, and weaknesses before starting negotiations to know where they stand with you.
Be honest about your intentions as well—you don’t want them to think that there’s more going on than there actually is. Determine what outcome would satisfy you: do you just want money? Do you need access to their network? Are there particular products (inventory, maybe) or services that are important for your business and can only be provided by this partner?
Being upfront about these things will make things easier when it comes time to negotiate specific terms of an agreement.
- Take your time so that the license agreement creates a long-term, mutually beneficial relationship.
The last piece of advice is to take your time so that the license agreement creates a long-term, mutually beneficial relationship. If you have the luxury of being able to take your time on this decision, by all means, do so.
The more time you put into negotiating a licensing deal, the better it will be for both parties. This is especially true if you sell something online and can sell it worldwide.
