Since he founded it in 2008, Jim McFarland’s sports bottle company, FLEXR, struggled to get shelf space in athletic stores and online retail sites catering to runners and cyclists. McFarland, who patented the bottle’s disposable liner design, kept his day job at an aeronautic engineering company while struggling to break even on his five-employee Chino (Calif.) business.
FLEXR’s prospects brightened in 2012, after an apologetic retailer turned McFarland down but suggested the bottles might sell better branded with college logos. At a trade show last year, the company’s U.S.-made, BPA-free bottles got noticed by a collegiate licensing agency interested in selling branded editions on campus bookstores and on school websites.
Now, McFarland has contracts with several major universities, including the University of Texas at Austin and the University of North Carolina—both schools competing in the NCAA basketball tournament—as well as numerous private and community colleges around the country. And he has signed a major distribution deal for his products that could get them into 4,000 campus bookstores by the end of 2014.
“This is going to be a major jump-start for us. We made about $120,000 in 2013, but we could triple or quadruple that this year,” McFarland says. “I’m expecting to hire 15 or more new employees.”
In 2013 the sale of licensed products such as sports team logos and celebrity images amounted to $110 billion in the U.S. and Canada, according to the International Licensing Industry Merchandisers’ Association (LIMA), a trade group. The practice can be a lucrative avenue for small businesses, allowing them to boost sales and increase customer awareness of their products. But how does an entrepreneur tackle the often-confusing world of licensing deals and navigate legal contracts, royalty payments, and distribution?
Here are some tips for getting started from Marty Brochstein, senior vice president of LIMA, based in New York City. The organization represents more than 1,000 companies in the licensing industry.
Understand the value of licensing: “It’s very expensive to build a brand on your own, develop a logo and brand identity, and do all the marketing yourself,” Brochstein says. “Licensing is a shortcut to market, where you take the equity of another brand and use that as your path to the store shelf.” Established brands generate emotion in people who have a built-in affinity for their college, their favorite cartoon character, or their hometown football team.
How a licensing deal works: Licensing lets a small business effectively rent the brand equity that the owner of that intellectual property has built up over the years. In return, the business pays the brand a royalty—usually a percentage of the wholesale cost of the item. “There is a financial commitment upfront in the form of a guaranteed minimum payment, so even if you don’t sell as much as expected, the IP owner still gets paid,” Brochstein says.
You will also be required to sign a licensing agreement that guarantees product performance standards and grants the license holder approval over how the final product looks and works. “You’ll have to show that you have a quality product that the IP owner can trust with their brand,” he says.
Financial considerations: Licensing adds extra expenses on the production side in the form of royalties, but it can reduce the cost of manufacturing as volume goes up. “If you’re spending 5 cents a bottle to make 10,000 bottles, your cost might go down to 2 cents a bottle due to volume discounts if you’re making 100,000 bottles,” Brochstein notes. Small business owners considering licensing should estimate the cost of royalty fees and see if they are offset by manufacturing discounts, increased sales, and the higher price tag branded products can command.
What brand to license: Just about any brand can be licensed, from fictional characters and corporate logos—both current and classic—to artwork and celebrity likenesses. You can even license a new brand—a local artist with a distinctive style, for instance—that seems promising. “Working out a deal with a new artist might be a way for her to test her appeal and you to pay a much lower royalty,” Brochstein says. Of course, you won’t have the same guarantee of a built-in market, but sometimes popular concepts come in under the radar.
How to get started: Brochstein recommends that you shop your product category exhaustively. “I can’t stress enough how important it is to see what’s out there and what isn’t. Know your customer base and try to think of a license that would appeal to them but is not already out there,” he says. “Retailers often look at this as a zero-sum game. You almost have to knock somebody else off the shelf in order to get stocked.”