The Brand Licensing Process — Step 5 : Define Licensing Opportunity

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After completing the due diligence process, the licensor should normally be left with two to three qualified prospects. Now it’s time to assess the size and scope of the actual license agreement. This requires the licensor to work with the selected candidate licensees to fully understand their strengths and determine whether the licensing opportunity is viable or not.

Outstanding candidate licensees will immerse themselves in the licensor’s brand so that they can fully understand its positioning and architecture. From this, they should propose the look and feel of the products. They will incorporate the brand attributes into the design of their products. Licensees will pay particular attention to the placement of the logo on the product, the material from which it is constructed and how the logo is affixed to the product. A sharp licensee will request that the licensor provide them with the brand’s style-guide so they have the required information to do this.

Simultaneously, the licensor should request that the candidate licensees develop three-year sales projections so they can assess the scope of the license. This forecast should be a conservative estimate of the sales the licensee thinks they can achieve and is segmented by region, channel and Stock Keeping Units (SKUs). It also includes the number of new products the licensee thinks they will introduce each year.

The sales projections provided by each of the shortlisted licensees are compared with each other. The licensor then evaluates the proposals to assure they are viable, achievable and maximize the brand opportunity. For example, a prospective licensee who is number one in their category may only wish to dedicate a small portion of their business to the license, whereas the company number three in the category may be willing to convert all of their sales to the newly licensed brand. In this case the scope of the opportunity with company number three may be much bigger

than company number one.

Therefore, from a scope perspective the number three company may be preferred. However, it may be determined that converting the entire product from its current state to a brand state may not be achievable. Once the sales projections have been vetted, the licensor should use these to rank the candidates. The size of sales targets can then be used as a guide when negotiating the following quantifiable deal terms: minimum sales targets, guaranteed royalty minimums and cash advances. As these deal terms are based on the forecasts developed by the licensees, they should not only be fair, they should be robust and achievable. With this, the groundwork for the actual contract is prepared. The licensees and the licensors then go into the next step.

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