The business relationship between a licensor and a licensee often goes kaput because of an error of judgement or stepping beyond the line of control. Here are the mistakes that must be avoided to ensure that the deal turns into a profitable and long-lasting one.
Promising the Moon
Licensees in order to successfully bag the license often end up projecting a best case scenario rather than a more realistic view. There is an imperative need for licensees to realise that these projections help set the base for licensors to develop minimum sales targets, royalties etc. They further cultivate into clauses of the contract. Overpromising on the part of a licensee can cause the licensor to develop unrealistic expectations which can ultimately lead to a rift between the two and in worst case, cause termination of the contract.
Putting on Airs
When trying to negotiate a license, licensees often try to secure as many regions or channels as part of the deal. They sometimes are unable to understand the brand potential and strength in its true regards. They may overestimate the power of the said brand which leads them to believe that the brand power alone is enough to sell the product and gain traction. It is of utmost importance to check the brand potential and approach the licensor realistically with complete profile for all the distribution channels the licensee wishes to acquire.
Licensors when signing an agreement expect the licensee to custom design the attributes of the brand into their product and not just slap the logo to an already existing product. They wish for the licensee to develop the product in accordance with the brand’s style guide and in terms with their product attributes. If the developed product fails to meet the brand quality and expectations, the product is asked to be reworked upon and the licensee loses key sales opportunities. It also endangers the relationship and future association prospects of the two.
Typically, the licensing agreements fall under the jurisdiction of chief financial officers or company presidents. They are the ones familiar with the terms and conditions of the agreement and are aware of the licensor’s expectations. It is important to keep in the loop people who execute tasks such as sales, marketing and product development. They must be made aware about the approval process or any required flow of communication to avoid confusion and efficient working. Licensees should also take precaution while entering into a verbal agreement with the licensor which in any way contradicts the written contract. If they don’t get their direction in writing, they can later be held liable for breaking the contract.
Selling in Unauthorised Channels
In order to meet the sales targets the licensee is often tempted into selling outside of their authorised channel of distribution. This can prove fatal to the licensor in case they don’t have trademark rights in the region or already have a licensee in place. For the licensee it can result in termination of the contract or very heavy penalties.