Trademark licensing: Let others use your brand for royalties. Disney earns $5B+ annually from licensing alone. Typical royalty: 5-15% of wholesale price. But lose quality control = lose trademark. "Naked licensing" destroys trademark validity entirely.
How Licensing Works
Licensor owns trademark. Licensee pays to use it. Royalties based on sales, units, or flat fee. Licensor must maintain quality control. Agreement defines territory, duration, products, standards.
Revenue without production: You don't manufacture anything. Licensee handles production, distribution, inventory. You collect checks and monitor quality.
Royalty Structures
Percentage royalty: 5-15% of net sales most common. Luxury brands charge higher (10-15%). Commodity products lower (3-5%). Negotiate minimum guarantees to ensure baseline income.
Flat fee: One-time or annual payment regardless of sales. Simpler accounting. Lower upside if product explodes. Better for smaller deals or untested markets.
Hybrid: Advance against royalties + percentage. Advance covers your costs upfront. Recouped from future royalties. Standard in entertainment licensing.
Quality Control Imperative
Trademark law requires quality control. If licensor doesn't monitor licensee quality, trademark becomes "naked license." Courts can invalidate trademark entirely. Not optional - legal requirement.
What counts: Product samples for approval, manufacturing facility audits, customer complaint monitoring, right to inspect, standards documentation. Paper trail proves control.
Agreement Essentials
Territory: Geographic limits (US only, worldwide, specific countries). Licensee operates only within defined area. Multiple licensees for different regions common.
Duration: 1-5 years typical, with renewal options. Shorter terms let you escape bad partners. Longer terms attract serious licensees willing to invest.
Products: Specific goods/services licensed. "Apparel" too broad - specify "men's casual shirts." Prevents licensee from unexpected category creep.
Exclusive vs Non-Exclusive
Exclusive: One licensee per territory/category. They pay premium for exclusivity. Simpler management. Risk: If they underperform, you're stuck. Include performance minimums.
Non-exclusive: Multiple licensees for same territory/category. More revenue potential. More management complexity. Licensees compete against each other - may reduce individual effort.
International Licensing
Territory-by-territory: Different licensee per country. Local expertise. Complex to manage 20+ relationships. Common for consumer goods.
Master license: One licensee handles entire region (all of Asia, all of Europe). Sublicenses to local partners. Single point of contact for you. They manage regional complexity.
Due Diligence
Vet licensees thoroughly: Financial stability to pay royalties. Manufacturing capability to meet standards. Distribution reach for your target market. Reputation alignment with your brand.
References: Talk to other brands they've licensed. Visit their facilities. Review their existing product quality. Past performance predicts future results.
Termination Rights
Quality failure: Right to terminate if standards not met. Include cure period (30-60 days to fix) before termination. Document every quality issue.
Minimum performance: Terminate if sales below threshold. Prevents licensee from sitting on license without effort. Use it or lose it clause.
Change of control: If licensee is acquired, you can terminate. New owner may not align with your brand. Protects against unwanted partnerships.
Audit Rights
Include audit clause: Right to examine licensee's books. Verify royalty calculations accurate. Hire third-party auditor. Licensee covers audit cost if underpayment found (typically 5%+ variance threshold).
Frequency: Annual audit rights standard. Surprise audits for suspected issues. Documentation requirements specified in agreement.
Brand Guidelines
Provide comprehensive guide: Logo usage, colors, fonts, positioning, co-branding rules. The more specific, the fewer disputes. Update as brand evolves.
Approval process: All marketing materials require licensor approval before use. Response timeframe (5-10 business days). Deemed approval if no response prevents delays.
Trademark Lens checks trademark availability - licensing only works if you own clear trademark rights. Confirm registration before entering licensing negotiations.