I. Distorting reality
Licensors interested in licensing a category to a prospective licensee will ask for sales projections by region and by channel along with a sales plan. In trying to "win" the license, the prospective licensee will often provide the licensor with a "best case scenario" instead of a more realistic case. The licensee often ends up accepting sales targets they may not be able to achieve ultimately resulting in a breach of contract.
II. Miscalculating sales targets
Prospective licensees often try to secure multiple regions or channels. The licensee often has only one opportunity to sell the branded merchandise. If that falls through, the licensee fails to meet their sales and royalty targets and may request royalty relief. When the licensee is not prepared to demonstrate how they are maximizing their rights, not only will they not get the royalty relief, they may also be required to develop a plan on how they will exploit their license. The licensee may lose rights to certain channels or regions if they can not comply.
III. Creating unrealistic expectations
Licensees may not fully understand the true strength of the brand whose license they just acquired. The licensee may overestimate the power of the brand believing the brand alone will result in acquiring new clients or larger programs with existing clients. When new sales fail to happen, the licensee may feel like they got sold a bill of goods. A license works best when a great product is combined with a great brand to solve an unmet consumer need.
IV. Logo slapping
Licensees often do not understand that the licensor will expect them to custom design the attributes of the brand into their product, and not just logo slap. The licensor wants the licensed product to be of a quality that the licensor would be proud to have on a retail shelf next to the internal product. When the licensee doesn't meet the licensor's requirements, the product often does not get approved and/or needs to be reworked resulting in lost sales opportunities.
V. Failure to follow the approval process
Licensees may not fully understand the approval process designated by the licensor and may not give it proper consideration. Many products are not approved because the licensee has not followed the approval process. This often results in the licensee missing a modular shipment date or selling an unapproved product. This can mean the loss of millions of dollars in sales or worse.
VI. Not knowing the contract
Typically licensing agreements are negotiated by company presidents or CFOs, who are individuals familiar with the contract terms and the licensor's expectations. If the people who actually execute the program on a day to day basis are not made familiar with the contract, obligations could get overlooked. This can place a strain on the relationship and ultimately lead to a termination in the contract.
VII. Not prepared to invest in the license
A licensee may not invest fully in their newly acquired brand licensing rights. However, the licensor expects growth in the licensed category as well as the licensee to pursue every channel and every category designated. Without proper investment, the licensee will not achieve the results anticipated but will still be obligated to meet the royalty and other financial commitments in the contract.
VIII. Selling in unauthorized channels
The licensee may be tempted to sell licensed product outside of their authorized channels or territory to meet contractual sales minimums or guaranteed royalty commitments. When this occurs, the licensee may put the licensor at risk if the licensor has no trademark rights in the region or if another licensee is authorized to sell in the channel or territory. Therefore, licensing contracts come with stiff penalties, up to and including termination.
IX. Trusting the other party has your best interests in mind
Licensees can get into trouble when they trust that the licensor has their best interest in mind.
- A licensor may license a category they are vacating because they have strained a relationship with a retailer or failed the consumer in a category.
- Licensees often may share ideas with the licensor only to have them "taken" by the licensor.
- Licensees are usually granted a non-exclusive license. The licensor may even choose to compete directly with the licensee or pitch one licensee against another.
If the licensee is unaware of the licensor's intentions, the licensee may be unable to meet their contractual obligations or suffer costs greater than expected to meet them.
X. Not following the written contract
Licensees can get into trouble when they follow verbal directions that are in conflict with the contract. This is a difficult predicament because the licensee may feel pressure to comply with the verbal direction. They can later be held liable for breaking the contract.
-Pete Canalichio, Brand Licensing Expert, The Blake Project
Sponsored by: The Brand Licensing Workshop