How to Sign Your Best-in-Class Licensees
Pete Canalichio explains the steps needed to find, perform due diligence and sign top notch licensees to build a successful and enduring brand licensing program. You can view the next video in this series here or on his YouTube channel.
Well, Hugh Simpson back with Pete Canalichio, formerly of Coke and Newell Rubbermaid. Now we’re gonna talk about the most important thing that Pete had to do: the dealmaking.
Show me the money!
Exactly. You know, we’ve gone through the whole process of what are the categories, how do you choose to go to market via licensing, how do you find those prospective manufacturers, how do you vet them to make sure that they can actually do what they say they’re going to do, then defining the scope of the opportunity. Now we’re at defining those deal terms and getting the contract done. And this is really where the rubber meets the road. So you know, the things that are important–the key factors–of any licensing contract are, for example, what’s the royalty rate; another factor is what’s the length of the contract; what regions; what channels; what are the definitions of the categories. So all these things come together to create and firm up and really put teeth into the contract of what that partner is going to do for you. So it’s really important to be able to take what they’ve given you up to this point through an application–through the forecasting–and start to put it in and define those deal terms. In fact, I’ve just finished up a white paper on this very subject, which is Defining the Licensing Deal Terms that’s coming out at the end of April. So this webinar series will complement that, and of course that will complement the webinar series.
Absolutely. So give us an example–we talked about the closet, Newell Rubbermaid–give us an example of how that worked when you did it.
Sure, sure. And this has got to be a win-win, right. So here, when you negotiate an agreement, especially when you’re looking at a partner that you want around for possibly over a decade, you’ve got to know that they’re actually going to be profitable with this particular licensing contract. So you’ve agreed what brand, so in this case Newell Rubbermaid. Say the Rubbermaid brand is the brand you want. What category? It’s going to be in the closet accessory that does not fix to the wall. So these are the ones that hang on the back of the door or sitting on the rod or right on the floor. And then the length of the contract–maybe it’s three years, maybe it’s four years. And then what’s the royalty rate? So in the case of Rubbermaid, you know, they’re a top tier brand. So they might get ten percent; they might even get a little bit more than that depending on a couple of things–the strength of the brand in the particular marketplace and the probability of that particular category. So in closet accessories, is it a brand? Is it a category that’s very profitable? You know, in other words, over fifty percent. Or is it a low profitability? And I’m talking about a gross margin here of maybe twenty percent. So that’s going to skew what royalty rate you can get. And then things like minimum guarantees. So what’s a minimum guarantee? Well, if the manufacturer says, “Look, I’m going to produce $1 million worth of merchandise in year one, $2 million worth of merchandise in year two, and $3 million of merchandise in year three” wholesale–sell to the retailers–then if you got a ten percent royalty, then that would equate to $100,000, $200,000, $300,000. Well, you’re not going to expect that manufacturer is going to agree to all that, but what you might ask them to agree to is maybe 25, 30, 35% of that. So now, the minimum guarantee is $25,000 for year one; $50,000 for year two; $75,000 for year three. And the manufacturer should say that is very reasonable. And what you’re asking the brand owners is, “I want you to commit, put your money where your mouth is, and say that you’re actually going to execute this agreement.” So that’s part of the plan. And then the other thing you might ask them is let’s make sure that you agree to a minimum number of sales. So if you say you’re gonna do a million dollars, maybe you agree to a minimum sales of $500,000. That way, you know you’re actually getting product in the marketplace because just getting the royalty check is not why you get into brand licensing. You go into brand licensing because you want to make sure the brand is in the product on the categories in those retailers that the consumer expects them to be in.
Yeah. Let’s give an example where it’s a product in Walmart, okay. And it’s related to the Rubbermaid brand, and you’re having a third party being involved. Do you actually call Walmart to make sure this company is really doing what they say they can do? And they’ve done it with Walmart? Is that right through Walmart to say, “I want to talk to the person responsible for buying in this area, and I want to make sure you’re for real.”
That is a great question, Hugh, and absolutely you do that. So as kind of part of the final piece before you sign that contract, you go and you check references. So you’ll go to the buyer, really check the references, really talk to the buyers–and they said they are best-in-class in this particular category–and ask, “what do you have to say?” You might talk to other licensors, other brand owners who they’ve licensed, how are you performing in your license. And then you might check things like what’s their delivery rate, are they keeping the product stocked on the shelves, all those things are very, very important in making sure that you’re signing up with the right guys. Because your name is the one that’s going there.
The third party’s name’s not going on there. Yours is going on there.
It accounts directly for you, and that’s why it’s so important to make sure you have your third party; everything for the deal; and 1, 2, 3, 4, 5–whatever it is. And on your product package when you put this out, you’re gonna have all of this available for the person that buys this. Really step-by-step, all of these PDF files of everything like that.
Right. Yeah, we give everyone all they need to know, step-by-step, so that they are equipped and armed to go and execute their own brand licensing program.
Great, what’s our next video gonna be on?
The last video is going to be on orientation and business planning. So you know, as you say you’ve signed the contract–you’re not finishing, you’re just starting–and you want to make sure that your partners understand how they get approvals done, who are all the player, and that they have a plan to actually meet and exceed their goals.
Great. Well that’ll be the final video. That will be the one that you definitely want to be watching.