Now, you have your dream trademark (brand) registered and you started using it to distinguish your awesome products or services form that of the competitors. Thus, creating brand awareness among your customers. And thanks to your persistence and dedication in no-time your trademark is recognized for its quality, reliability and trustworthiness of the products or services sold under it. That is great! By doing this you turned your trademark into a valuable asset of your company. And now, you can increase that value through more open collaboration with outside partners by giving them the permission to use your trademark and turning your brand into active working asset. „But how your brand works for me?” - you may ask. Well, by licensing it.
As every business is unique and you are the only one who can come up with the best business design that matches it, we have put together information about the different business models of trademark licensing, so that you can choose one, a combination or all of them to implement into your business. And we have included a step – by- step guide on how to prepare for a successful negotiation for your trademark licensing agreement so that you can start right away!
So let’s get started with
#1 Business models how to get your brand to work for you
1. Adding new products or services to your business
In your day-to-day business activities you put your trademark on the products (goods) or services you provide as a core business activity. Those are the goods or services your company is known about and your trademark has matured in (is known about). You can add new products or services to your core ones without the costs of organizing new production facilities. By licensing your trademark to another company that can apply your trademark to products or services that this other company provides. The business reason for this is to enter new market segments, on one hand, and extend your trademark (brand) recognition beyond the goods and services it originally was applied for. This type of business modeling is called “Brand (trademark) extension.” It can be a very successful business model and even bring back new customer appreciation to the main goods and services the trademark was applied for.
For example, let's take the “SONIC THE HEDGEHOG” trademark of SEGA Corporation. The brand was registered in the early 1990s and was originally applied for video games. Now in 2020 or 30 years later SEGA licensed its right over the brand to Paramount Studios for the production of a movie under the title „Sonic the Hedgehog” which became a huge success. As a result of this the brand “SONIC THE HEDGEHOG” now covers not only video/electronic games but also creation and distribution of movies. The brand extension not only increased the revenues of SEGA from the income of the movie “SONIC THE HEDGEHOG” but also stimulated an increase in sales of the different games under the mane of “SONIC THE HEDGEHOG”.
2. Increasing the appeal of your products or services or entering new market
Cooperating with another company to jointly create a new product or service that bears the trademarks of all the participants is the second business model for using your trademark. This strategy, if rightly applied, is a win-win deal for both you and your partner as you both further extend and exploit the good reputation of both trademarks. As in the brand extension we described above this model can bring new appeal to your regular customers, bring you additional income from the new products or services and the new customers associated with those new products or services. This strategy can even be used to diminish a particular weakness of your product or service. The difference from the brand extension model is that in this case the new products or services bear the trademarks of both the partners.
For example the collaboration of Apple Inc. and Mastercard Inc., resulted in the creation of Apple Card – a payment card that bears the trademarks of Apple and Mastercard. This collaboration made it possible for Apple to enter a totally new market - that of credit cards, and for Mastercard to increase its appeal to the Apple customers. Another recent example of this is the multiyear marketing, licensing Partnership between NBA and Mondelez (Oreo Cookies) that includes selected NBA’s team logos on Oreo cookies.
3. Component or Ingredient Branding (for B2B businesses)
If your company produces goods or provides services to other businesses that incorporate them into their own goods or services that are ultimately sold to end –users you may consider the following business model. When selling your products or services to your business clients you can also license them your trademark, so that they can put your brand on the packages, in advertisements or on the host products or services. By doing so you increase the brand awareness of your products or services among end-users of your clients, who will recognize it for its quality, reliability and trustworthiness. On the other hand, with increased brand awareness among the end-users of your customer indirectly you shall increase your business customers. That is so, because your business customers shall want to include your products or services into theirs, manifesting this by using your trademark, as this will increase the appeal of their own products among their end-users as a result of the reputation of your trademark.
Examples of such successful business models are the Intel Inside logo on personal computers equipped with Intel chips, or cookware, using Teflon non-stick technology, or Oreo cookies inside Milka chocolate.
4. The all well known merchandising
This is a relatively low cost high margin business model. By allowing manufacturers of ordinary consumer goods such as palates, mugs, towels, caps, clothes, to name a few, to apply on their products your trademark adds appeal to an otherwise commonplace object. This is a means to distinguish their ordinary products in the marketplace. The consumer recognition and appeal of your trademark allows the sale of those ordinary objects at a premium price. The higher price adds to the profit margin, a percentage of which flows back to you adding to your profit margin. This is a win-win‖ formula for both you and your partner. Now here we should say that although there is overlap in practice merchandising and brand extension are two different business models. The difference comes from the fact that in the brand extension model the choice of entering a new market category is usually determined by the natural fit with the original customer base of the trademark to be extended.
For example, as we described above in the case of „SONIC THE HEDGEHOG” trademark, SEGA made a brand extension by entering into partnership with Paramount Studios and thus extending the brand into movie production and distribution. At the same time SEGA is allowing manufacturers of toys, cloths etc. to use the trademark and image of „SONIC THE HEDGEHOG” onto their ordinary goods – made merchandising. As you can see brand extension is more of a strategic partnership for creation of new products while merchandising is partnership for using current, ordinary products under your trademark.
5. Franchising
Franchising as business model can be described as where you - that have developed a particular way of doing business, expand your business by giving other existing or would-be entrepreneurs (franchisees) the right to use your proven business model in another location for a defined period of time in exchange for payment of initial and ongoing fees. Along with the right to use the business model, you permit the franchisee to use your intellectual property and know-how and provide both initial and ongoing training and support. In essence, your successful business is replicated and run by the franchisee under your supervision, control and assistance. The intellectual property rights that are licensed in a franchising arrangement almost always include trademarks and copyright, and often include trade secrets, industrial designs and patents – depending on the nature of the business. As long as your underlying business model is sound, you can use franchising as a way to enter new markets in a cost-effective manner. As you can see Franchising is a specific business model that includes more than just trademark licensing and we put it here for the fullness of the information.
Now, let’s get into the
#2 Step – by- step guide for a successful negotiation of licensing agreement
A successful licensing agreement is in essence one that succeeds in creating a mutually profitable relationship. To ensure such an enduring experience you must know as much as possible about the company you are about to enter into partnership. Now follows a list of steps to be taken to define the information you will need and how to get it.
1. What is the organizational structure of the company you are about to enter negotiations with:
While this is a very basic starting point, it is very important to know whether the potential licensee is a corporate entity, a partnership or an individual/sole proprietorship. The legal structure of your partner will affect the content of the license and will determine the need for warranties or guarantors as to the performance of the individual or individuals involved. For example a guarantor provides you with some assurance of at least financial return if the individual licensee fails.
2. Determine what the other party wishes
By knowing what are the would-be licensee wishes you can check whether they are within your licensing program goals and models. For example if you are dealing with a manufacturer, wholesaler or distributor who wishes to be a licensee this will affect your determination as to what kind of license (the business models we described above) you would use for the particular deal and what your expectations may be. If the licensee wishes to manufacture, wholesale and distribute the product that is going to bear your trademark it will be reasonable to know how it plans to accomplish this. This included what is its business plan, is the would-be licensee going to be only a manufacturer, or only a wholesaler or distributor or will it do all the three. If, for example your future partner wishes to do manufacturing, wholesale and distribution how is he going to this – alone or with partners and if with partners who are they. What type of license the future partner is looking for – worldwide or territorial? This information will affect the structure of your license agreement and shall determine whether there is a need for a right to sublicense your trademark to be granted and to whom and under what circumstances.
3. Financial information for the would-be licensee
What are the financial results of your future partner and what are its abilities to obtain future financing. This information you need in order to determine if the would-be licensee can fulfill its obligation under the agreement and continue to expand its business. If the financing for the future is non-traditional, for instance not a bank or financial institution (for example venture financing, private debt financing, crowd funding etc.), the nature and reliability of those sources will have to be looked into carefully to avoid the licensee becoming overextended.
4. What business and licensing experience the would-be licensee has
By acquiring this information you check the ability of your would-be licensee to fulfill its obligations under the proposed license. This can help you assess the existing or previous business experience of the future licensee relevant to the licensing opportunity you offer. You may ask if the would-be licensee was a former licensee, how did the relationship end and why. If the licensee is still operating under other license arrangements, it is important to know if there is a conflict of interests or possible conflict of interest or are the different products or services complementary to each other. If more than one license agreement is in force you must know if the proposed licensee manages two or more licenses and the financial and performance criteria of each one of them. All in all, the key concern for you is the experience level of the proposed licensee and its ability to fulfill the licensing obligations relating to your trademark.
5. What products or services are of interest to the would-be licensee
If an expansion of a product area or service areas is being proposed by the would -be licensee, you should be concerned whether it is capable of fulfilling the obligations under the agreement with regard to these new product area or service area which may be unfamiliar to you. If the license involves the expansion of your traditional product or service lines, it may be necessary for you to bring in expertise in the product or service categories so that the licensee better understands the investment of time and finances involved to pursue the proposed expansion, on the one hand and for you to set the standards for quality control, on the other. Based on the information obtained by you concerning the would-be licensee, you are better able to determine whether, in fact, the proposed licensee is capable, financially and business-wise, to bring the new products and/or services to market successfully. The time required, the financial commitments and/or the business expertise are often under or over estimated by potential licensees. In many cases, therefore you as licensor will have to make these assessments.
6. Business Plan of the would-be licensee
The licensee as well as you must have a business plan relating to the prospective license agreement, including the timing of the different steps for bringing the products and/or services to market as well as the promotional methods to be used to obtain and maintain market share, financial requirements and methods of finance. This is of great importance in order to avoid future disputes and flows. For example if you see a six-month window of opportunity to bring the products or services to the marketplace and at the same time the would-be licensee needs one year or longer to do so, clearly the vision of both of you is different and this particular licensee arrangement may not be viable. You can work together and create common business plan to come up with a viable way for completion of the license agreement so that the product and/or service can be brought to market as soon as possible within the territory or region of interest.
7. Projected sales data
As part of the business plan, it is also important that the would-be licensee provides you with projected sales data so that a reasonable royalty can be set that enables you to fulfill your goals, while at the same time providing a reasonable return to the would-be licensee so that the license is viable. By using projected licensee sales provided by the proposed licensee you can avoid the problem if actual sales do not live up to projections. In that case, the licensee cannot blame anyone but himself for the numbers. If you set unrealistic sales projections to which the licensee is not likely to live up to will only be a recipe for disaster.
8. Promotional and Marketing Information
Often the marketing plan for the licensee, the proposed manner in which a product or service is going to be marketed, advertised and/or promoted is of great importance. Both the quality and quantity of the advertising and promotion together with trade incentives and so forth will greatly affect how the products or service is represented and perceived in the marketplace and as to the reputation that the products or service will garner. In that regard it is good practice to know who or what advertising agencies or other professional services the proposed licensee intends to use.
9. Sales Territories
Ultimately, an appropriate marketing territory will be mutually agreed upon by you and your future partner. In many cases a proposed licensee overestimate their ability to penetrate and satisfactorily supply a given territory. To determine the appropriate size of the territory, the assets and experience of the proposed licensee must be assessed in terms of its distribution facilities, manufacturing facilities and future expansion plans as well as the proposed licensee’s business acumen. If the proposed licensee is going to both manufacture and distribute, the issue of how the product and/or service will get to market, be marketed, get monitored for quality control and so forth must be dealt with at an early stage to see if the proposed licensee has the necessary present and future capability to meet its obligations including proposed launch date.
10. How to get the information
Public sources
A great deal of this information is not always secret or hard to find. Sources such as annual reports, government filings, credit ratings, existing sales catalogues for product lines or services, newspapers, magazines or trade journals, can provide a wealth of information. It is worthwhile to do as much preliminary or pre-license information gathering as possible before entering into a trademark licensing negotiation. You do not wants to expend large amounts of time and money on professionals to negotiate or draft a license agreement if one, or both parties, is not likely able to fulfill the obligations of the potential agreement.
During the different stages of the negotiation process
A simple way of disclosing relevant but confidential or sensitive information can be done under mutual non-disclosure or confidentiality agreements to be entered into by you and your would-be licensee to protect the respective sensitive or confidential information and materials. This should be done at the first step of the trademark negotiation process – the expression of interest. This is the stage where the preliminary assessment of the information provided by the would-be licensee and whether the future partner can fulfill your licensing goals.
The traditional next step in the negotiation is when you and your future partner are coming together and agree on a letter of intent or memorandum of understanding, which can be binding or non-binding. This document essentially sets out the major or principle terms of concern to the agreement of both parties in terms of an ultimate license agreement to be entered into as well as the timing for further due diligence, further inquiries and the actual drafting provision.
The next step in the negotiation is usually a ―cooling off period‖ where you and your future partner conduct your own more in-depth due diligence investigations of each other to determine your relative abilities to fulfill the terms, again set out in the memorandum of understanding or letter of intent. At this you can, again, in a confidential way, exchange more detailed information relative to your financial and business abilities with a view to finalizing the license arrangement so that when the license drafting commences the professionals who draft the license agreement will have a better or realistic understanding of the terms and conditions on the major points that would be contained within the eventual license agreements. Hopefully in this way neither party will be surprised by the first draft agreement between the parties.
Once the investigative period expires you would normally enter in to the negotiation phase where drafts of the terms and conditions of the agreement are passed between you and your future partner as you move to a final agreement.
IMPORTANT POINTS TO REMEMBER
1. Wherever possible it is always better to be the party that drafts the original agreement. If, you have the possibility of drafting the original draft document do not hesitate to do so. There is certainly additional cost but from that point forward the negotiation proceeds on the basis of the original draft‖. This provides a great practical, as well as psychological, advantage.
2. Form a licensing team of accountants, lawyers and licensing professionals. Their preparatory work will create a realistic picture so that you can succeed under the license and that realistic numbers as well as terms and conditions are agreed upon.
We hope the information above will help you find the best model for your particular business to use your trademark as a source of passive income. You can also book consultation with a trademark attorney regarding your trademark licensing or check out our trademark services.
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