How to Evaluate a Licensing Partner: Avoid These 6 Mistakes

To do licensing right, resist the temptation to do it right now.

If you’re reading this, then you’re no doubt familiar with the world of brand licensing. You know the difference between celebrity licensing and brand licensing. You can regurgitate the perils of logo-slapping at a moment’s notice. You have LicenseMag.com bookmarked in your browser.

Yet even when brokered by experts, licensing partnerships can fail. Licensors sometimes let their guard down when dollar signs loom, while reasonable-sounding exclusivity clauses almost always sentence a deal to stagnation. Over the past 20 years, here are the six biggest signs I’ve learned that your potential partner will be a problem.

1.   They Have No Patience

Licensing can be profoundly profitable, but it’s not a get-rich-quick scheme. Deals take time — to vet partners, to negotiate contracts, to conduct market research, to develop supply chains, to execute marketing plans, to respond to market conditions — and that’s all for a single product.

A clear sign that a partner doesn’t appreciate this scope comes in the form of a seemingly innocent question: “Can I count on licensing money for my P&L next quarter?” The truth is they probably can’t; typically, it takes 24-36 months before sales kick in. That’s not only because of the work involved; it’s also because of a cardinal rule known to every businessman everywhere: You only get one chance to make a first impression.

The bottom line: Even if you, as the licensor, aren’t doing the heavy lifting, there’s still a lot of lifting that needs to get done.

2.   They Don’t Respect the Process

Here’s another litmus test we pose to partners: Will you complete a 10-page business plan? For big companies, this is child’s play, both because they’re filling out a template rather than creating a document from scratch, and because the questions are so common in the C Suite: What licenses do you hold? What royalties do you render? What guarantees do you offer? Most important, how does your brand complement the licensor’s?

If a licensee isn’t willing to fill out this form, they’re not serious. (Years ago, one potential client balked at this paperwork. “You know who we are — just do it yourself,” the CEO said. His more-indulgent competitor is now cashing major checks each month.)

The bottom line: Licensing is too important to your reputation and to your revenue to be left in the hands of a partner that can’t be bothered with the equivalent of the clipboarded questionnaire you get before seeing a doctor.

3.   They Want the World

Every licensee wants global rights. I get it — in theory, they should be able to sell their wares wherever they want. Yet the smartest licensors refrain from ceding this ground upfront. It’s too important.

The probable retort is predictable: “This means I can’t lock up China.” Here again, the truth is hard: That’s correct, at least initially. While many licensees claim global reach, only 1% operate on a truly global level.

Indeed, licensors who let licensees tie up territory invariably encounter intractable issues: What if your partner underperforms? What if their relationship with a key vendor sours? What if they start selling outside an authorized channel? Sorry — you’re stuck; your contract gave them exclusivity.

What’s worse, by the time you figure out a solution, it may too late: The retailers that have been putting your products on their shelves will now demand tougher terms.

The bottom line: The smartest licensors think globally, but act regionally.

4.   They Avoid Accountability

If a licensee can’t secure exclusivity, they may demand perpetuity. In my two decades, I’ve met more than a few licensors that were trapped in forever deals. Put simply, the number of things that can go bad over the years is almost uncountable. (One of our past clients neglected this critical clause; 15 years later, they’re superglued to a contract that’s costing them money.)

Happily, there is a solution: Smart licensors include “claw-back” clauses in their contracts. These clever provisions allow you to extract yourself from situations that sour. For example, let’s say your licensee misses their sales or royalty targets. If this happens on occasion, that’s understandable. If it becomes a pattern, only a claw-back provides the leverage you’ll need to impose penalties or to find a new partner.

The bottom line: If a licensee opposes a claw-back, they’re asking you to take a leap of faith, to risk your business when they’re not willing to risk theirs. Don’t do it.

5.   They’re a Small Fish

Before choosing a partner, it behooves you to understand who you’re teaming up with. The most frequent advice I give to clients is this: Don’t let a licensee try to build his business on the back of your license. As Ford, you don’t want to work with someone who thinks, “If I land Ford, I’ll be set for life.”

Instead, seek out partners that are established. Make sure their capabilities and connections are comprehensive. You want to work with someone who already knows how to manufacture, how to distribute, how to sell — not someone who’s learning on the job.

6.   They Focus on the Short Term

I hear the following story about once a month: A hot brand owner gets cold-called by a licensee. “We want to make you rich,” the latter promises. The advances sound generous and the projections rosy. Naturally, the licensor is flattered.

But licensing is a long-term program. The smartest licensors don’t chase short-term payouts; they think in terms of decades, not quarters.

To wit, here’s what I tell clients: Never accept the first deal you’re offered. Similarly, the biggest company isn’t always the best. Instead, the longest-lasting and most lucrative deals spring from deep research. Who’s the best manufacturer? Who has the best distribution network? Who provides the best royalty rate?

These are questions that require deep diligence to answer. But if you invest the time and resources from the get go, then I can tell you this with the confidence of having founded and run one of the world’s top licensing agencies: You can make a mountain of money.

Jeff Lotman is the founder and chief executive of Global Icons, a brand-licensing agency whose clients include Bob Evans, Crock-Pot, Ford, Nutella, Qdoba, the United States Postal Service, and Vespa. Follow him on Twitter at @jlotman.