Have you ever wished your company’s product could reach exponentially more potential customers than those you’re already targeting? Of course — who hasn’t? Licensing can take your small business and catapult it to a huge audience, but only if you do it wisely.
Here’s a primer on a few different kinds of licensing relationships you may encounter.
Who uses product licensing to expand their business?
Two types of small businesses may find licensing to be an especially good fit:
Product developers: If you have a strong product, but not the means with which to produce mass quantities of it, you may want to look into licensing your product. You’ll likely file for a patent to protect your design before seeking a licensing agreement with a manufacturer. When that company sells one of your products, you receive a royalty.
Artists: Licensing your design, composition or other artwork to a larger commercial entity can result in your product being reproduced for sale on a much larger scale — for instance, at a department store or through a creative-services marketplace. You may receive a royalty or a one-time payment, but partnerships can vary. Your work is already copywritten due to its documented existence, but you may wish to take further steps to protect your intellectual property.
A typical license specifies the following:
- A description of exclusive or nonexclusive rights (or both)
- Geographic territory
- Use limitations
- Term limitations
- Payment terms, also known as royalties or license fees
Who initiates a licensing agreement?
You may choose to seek licensing of your product as a marketing and sales effort. But especially if you’re producing a creative work, you may receive requests to use your work in outsiders’ projects.
SCORE client Nischelle Reagan, owner of Music Admin, describes how one of her clients may be approached to license their work:
“Someone wants to cover your song on their upcoming project, but you're not sure where to begin to grant permission, provide a license, and advocate for the accurate royalty rate. We'll handle the licensing for your song(s), advocate for your best interest, all while you maintain full song ownership.”
It can be flattering to be contacted, seemingly out of the blue, with a request to use your work. But remember that as the creator, you have control over how your work is used — either by you or by others who license your work. If you’re approached, consider having a business mentor or legal representative read over the request before making any decisions. Seek help to draw up a licensing agreement that makes you feel confident to work with other businesses.
What about franchising?
While a franchise may seem similar to a license, there are some key differences.
First, the franchisor retains control over the franchisee. For example, you couldn’t open a McDonald’s location and put spaghetti and meatballs on the menu a week later. The franchisor maintains standards for the business and can require franchisees to take certain actions.
In addition, both the franchiser and licensor receive royalty payments for the use of their work, but only franchisers are required to provide support and training to their franchisees.
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