Seven Considerations for International Licensing

Seven Considerations for International Licensing

Apparel companies are now, more than ever before, recognizing the great potential in having a global presence. Licensing is a cost-effective way for small to medium-size companies to "plant their flag" overseas, without launching speculative joint ventures or wholly-owned subsidiaries. As a licensor, a company can springboard off a local licensee that has the expertise and presence in a particular brand category, with the critical knowledge of local markets and tastes.

Licensing represents a way to move a brand into new businesses, new geographical markets and new distribution channels that otherwise would be unavailable without making a major investment in new manufacturing processes, machinery, or facilities, while maintaining control over the brand image.

Licensing in global markets offers important advantages, but apparel companies should keep a number of other factors in mind, such as the many cultural, linguistic, political, legal and financial differences that exist in different countries.

1. Brand identity. First and foremost, an apparel firm seeking to become a licensor must evaluate whether an international licensing arrangement will enhance and improve the company's brand. Putting the brand into the hands of an overseas licensee requires proper due diligence, as there is potential for brand damage.

The company needs to be sure the licensee can create and deliver products that are of the agreed upon quality, whose goals for the brand coincide with those of the licensor, and who will be a true partner in furthering the licensor's brand identity. Also, apparel enterprises run the risk of creating or strengthening a potential competitor should they decide to enter that market on their own in the future.

It is also important to understand and limit the time commitments that will be involved from a creative and management point of view, and that the proper person in the company is in charge of the international licensing program.

2. Selecting a licensee:

After thoroughly assessing the new market's potential, compile a list of promising licensee candidates. International trade show organizers and trade associations can be helpful in identifying and assisting with due diligence. If possible, try to speak with the licensee's past customers. Search for feedback on the licensee, for example, through the internet or in trade publications.

After meeting a prospective licensee, preferably in person, try to work with the prospective licensee on a trial basis if possible, and trust your intuition. The company also needs to evaluate whether the licensee has the financial strength to perform its obligations to promote the identity of the brand in a manner that will satisfy the stated objectives.

Contract terms

Key issues to address include: which products and trademarks are covered, the royalty arrangements and design fees, whether the arrangement is exclusive or nonexclusive, and the definition of the design and approval relationships relating to the products and product promotions. If any training is involved, any extra fees or charges need to be identified. Advertising and other financial obligations need to be clearly defined.

3. License grant

The initial step is to define the products and trademarks to be covered and the rights to be granted in the license agreement. A licensor can control the scope of the license by including and excluding certain products and trademarks, incorporating exclusivity and territorial restrictions, and limiting assignment and sublicensing arrangements.

4. Territory

A strong licensee in one country is not necessarily a strong licensee in another. Care should be taken in defining the territory and determining if the territory is exclusive or nonexclusive. Provisions prohibiting licensees from sublicensing or selling into other territories should be included as well.

Since the brand is the most important product, in addition to making sure translated materials are accurate and properly credited, a licensor should always take the time to register its trademarks and copyrights in the countries in which it plans to license its products. Although it is expensive, it is cheaper than buying those rights back from squatters.

5. Royalties and other payments

Most licensing arrangements include initial up-front payments that are generally nonrefundable license fees, used to compensate the licensor for the costs of investigating the licensee and covering documentation costs, and which may or may not be creditable to future royalties. The main source of revenue for the licensor is a royalty fee, and this fee may be fixed or varied based on a percentage of sales or other factors. Royalties are typically structured with minimum payments to ensure that the licensor will have a reliable royalty stream.

6. Approvals and other controls

The licensor will want to include provisions in the agreement allowing the licensor (or a designated representative or agent) to have periodic inspection rights of the manufacturing facilities to ensure the quality of the goods produced, and also to monitor whether the licensee is counterfeiting or otherwise engaging in illegal or unapproved labor or business practices. Even if a licensor is not likely to conduct such inspections, including these provisions is prudent.

7. Term and termination

The duration of the agreement is negotiable. If the licensee is planning to make a substantial investment in launching the brand overseas, it is not uncommon to have a 3-, 5-, or even 10-year agreement, with options to renew. This is often balanced by the licensor with a minimum sales requirement to ensure that the licensee will be actively marketing the licensed products. The duration of the license, and any renewal provisions need to be clearly set forth in the agreement.