What is Licensing?
Licensing is a simple concept that boils down to the right to use something owned or controlled by another person or entity. It is commonly used with intellectual property such as trademarks, patents, and copyrights. The owner of the IP becomes a licensor who may grant a license to the licensee that allows them to use, with defined restrictions, the IP.
Everyone reading this post has some interaction with licensing, although you may not have realized it. Ever been inside a Subway or McDonald’s? Franchising relies on licensing to grant permission to use logos, trademarks, and other intellectual property. How about buying a Mickey Mouse tee shirt? Disney doesn’t produce that shirt themselves, they grant a license to a licensee who is permitted to use their IP. Outside of brands, if you have installed software on your computer you are being granted a license by the developer to use their product.
For the purposes of this blog, we will focus on the brands, logos, and trademarks primarily. Our focus is in Sports Licensing – NFL, MLB, NBA, NHL, and NCAA. We will also touch on Entertainment Licensing such as Disney or Marvel.
Why License?
As we have learned, a license requires two parties to participate: a licensor and a licensee. With any business transaction, there must be incentives for both parties to join in this agreement. For the licensee, they look to license because the marketing power of the IP they are going to use – in retail, they are expecting they can sell more products with a license. For the licensor, they are getting an additional source of income based upon the license agreement.
Licensing is a simple concept that boils down to the right to use something owned or controlled by another person or entity. It is commonly used with intellectual property such as trademarks, patents, and copyrights. The owner of the IP becomes a licensor who may grant a license to the licensee that allows them to use, with defined restrictions, the IP.
Everyone reading this post has some interaction with licensing, although you may not have realized it. Ever been inside a Subway or McDonald’s? Franchising relies on licensing to grant permission to use logos, trademarks, and other intellectual property. How about buying a Mickey Mouse tee shirt? Disney doesn’t produce that shirt themselves, they grant a license to a licensee who is permitted to use their IP. Outside of brands, if you have installed software on your computer you are being granted a license by the developer to use their product.
For the purposes of this blog, we will focus on the brands, logos, and trademarks primarily. Our focus is in Sports Licensing – NFL, MLB, NBA, NHL, and NCAA. We will also touch on Entertainment Licensing such as Disney or Marvel.
Why License?
As we have learned, a license requires two parties to participate: a licensor and a licensee. With any business transaction, there must be incentives for both parties to join in this agreement. For the licensee, they look to license because the marketing power of the IP they are going to use – in retail, they are expecting they can sell more products with a license. For the licensor, they are getting an additional source of income based upon the license agreement.
Royalties and Guarantees
The basis for a licensing agreement, in a retail sales environment, is either a fee or a royalty payment. A fee would be a set dollar amount that must be paid in order to be granted a license; royalties are a percentage of sales that will be paid to the licensor. Royalties will scale depending on the success of the licensee and it is for this reason that many larger brands will require a royalty payment. They often also have a “minimum royalty guarantee” which you will have to pay if you fall short of the sales needed to generate the royalty payment.
Let’s look at an example of how a royalty and minimum guarantee may work:
Licensee agrees to a 10% Royalty with $10,000 minimum guarantee (note: these figures are low, round numbers for the example.)
If the Licensee sells $50,000 worth of product, they would generate $5,000 in royalties. This is below their minimum so they would be required to pay an additional $5,000 to reach their guarantee as per their contractual agreement.
If the Licensee sells $250,000 worth of product, they have now generated $25,000 in royalties. Since this has surpassed the minimum guarantee, they do not have to pay any additional amount over and above their royalty payment.
Royalty reporting is an important part of any royalty agreement and requires accounting for all sales accurately in order to pay the correct royalty amounts and make sure to meet any minimum guarantees.
In Sports Licensing, it is common for schools and leagues to have royalty rates between 10%-20% as well as minimum guarantees. Guarantees may range anywhere from a couple hundred for a small collegiate license up to $100,000 or more for NFL licensing rights.
I hope this gave you a solid overview of how licensing works, specifically with sports licensing. In future posts, we will go deeper into various licensing complexities such as sales channels, approval processes, how royalties affect pricing, and product development, to name a few.
-Joe
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