Brand licensing refers to a contract between a licensor and a licensee that entails the use of an intangible asset (Gardner 2012). This contract is related to leasing and renting of the intangible asset to another party who will be obliged to pay lease rentals to the licensor. The licensee usually seeks licensing from the licensor when the former intends to use a brand related to a particular product on a given territory (Battersby & Simon 2011). Such a contract tends to aid in enhancing the acceptability of a particular product in a particular market. Sales volume of the licensee increases due to the consumer association with the brand name applied in marketing (Stim 2010).
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Companies that enjoy a good public image thus tend to lease out their brand name to other companies that would enable them to receive more income. Such a licensing agreement is ideal in an environment where the company has not initially established its business (Gardner 2012). Despite the fact that the licensor may enjoy a good public image, it may not be possible to establish business in all parts of the world (Alexander & Lerner 2004). This is regardless of whether the business is a multinational company or not. Inability to establish operations is also contributed to the nature of the sphere in which the company operates (Reese 2011).
For instance, Harvard University is a reputable institution based in the United States. However, the university may not be able to establish its branches in many countries of the world. This is due to the complexity of the subject matter and the challenges that are associated with decentralization as it may compromise the quality of learning (Alexander & Lerner 2004). Being the world’s most reputable institution of higher learning, some institutions may attempt to offer their educational programs in collaboration with Harvard. This aims at marketing their educational programs as well as realizing revenue.
In the telecommunications industry, Apple and Samsung, the two major competitors, have developed superior brands that are admired by many users in the world (Stim 2010). However, the manufacturing operations of these companies are conducted only in a few countries (Reese 2011). At times, there may not be adequate resources to manufacture enough products to satisfy the demands of the whole world. In addition, consumers in different parts of the world may not afford the brands produced by these companies (Battersby & Simon 2011). This may render the firms unable to meet their targets in terms of sales volume and profitability. Due to the logistics related to the supply of these commodities, the firms may not have enough resources to access all the domains of the market. Therefore, this prompts the need for brand licensing contracts.
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Brand licensing contracts result in the mutual benefit of both parties to the contract. A licensee obtains improved market demand for his/her products (Gardner 2012). Based on the terms of the contract, the licensee pays regular amounts to the licensor for use of the brand and trademarks as royalties. Such a relationship reveals symbiosis in the operations; therefore organizations can help one another to maximize the value of their operations (Thorpe C. & Bailey 2009). One of the pre-requisites for such a contract to be started is the existence of a general goal to be achieved by the two contracting individuals or companies. Proper drafting of the contract must be made in order to incorporate the interests of both contracting parties (Stim 2010). This thus requires a thorough understanding of the legal principles surrounding the existence of both contracting parties. In addition, the terms of the contract must be binding and must clearly stipulate the rights and responsibilities of each of the parties (Battersby & Simon 2011). It should also specify the grounds on which the contract is to be revoked.
In other cases, intangible cases that can be subject to brand licensing include a song, a character, a name or any other particular product brand. For instance, an organization may use the identity of a famous person to advertise its products (Gardner 2012). This could range from any sphere including sports, music and other industries. The agreement between the person and the company would entail the person allowing his/her name to be used by the licensee to promote his/her products (Levy & Judy 2011). Payments for the patent will then be remitted to the person. A licensee is also at liberty to sign more than one license contracts with many licensors for the sake of one product. This will create a multi-brand scenario (Alexander & Lerner 2004). Organizations are thus able to experience a massive growth because of such brand contracts. Customer identity with the product is enhanced and therefore sales of the product as well as the profitability of the firm increase.
For licensing contracts to be started, the parties involved follow various steps. The process begins by a licensor selecting the categories of products to be licensed (Thorpe & Bailey 2009). A thorough search for the appropriate license then begins followed by the review of the terms and conditions of each of licensees. Negotiation of contract requirements thus occurs at this stage. Agreements on the consideration and duration of this contract are also discussed at this stage. This stage is then followed by the development of the prototype of the product and the incorporation of the brand particulars after which it is sent for approval to the management of both companies (Jean & Bastien 2012). The licensee, at this stage, will develop samples and concepts about the brand particulars. Approval of the licensed products for sale then follows. The licensees should present the developed prototype to the licensor for approval as to whether that would work best to serve their interests (Battersby & Simon 2011). Finally, the process is concluded as the licensees sell the licensed products to the authorized retailers. These retailers then distribute the products to the consumers. Branding creates the consumer acceptance of the product.
In order for licensing to be a success, licensees usually prefer a brand name that would attract consumers and hence boost the sales of the product. The licensee should ensure that the contract leads to a positive net present value of the project in the end (Battersby & Simon 2011). Any contract that does not lead to significant increase in sales volume and consumer preference should be re-evaluated to assess its economic viability. Such an evaluation can be made through the assessment of the market trends to derive a model that explains the market situation. This can be used to predict time series and performance trends of an organization. Cash flow forecasting is thus rendered appropriate in determining the success of the licensing agreement (Chevailer &Mazzalovo 2012). Regression analysis is one of the most appropriate forecasting methods (Levy & Judy 2011). It entails an analysis of the relationship between different variables affecting sales. A line of best fit can then be derived in order to represent such a relationship. As a result, it is possible to predict the expected trend of sales as time progresses and parameters vary. This enables the firm to make decisions on whether to continue with the licensing contract or not. It can also aid the licensee in deciding whether to incorporate other licensors in the license contract (Gardner 2012). Such a move will widen the scope of consumer acceptance of the product. In order to achieve the major financial objective of the firm, proper investment valuation is important (Stim 2010). The management should adopt effective capital budgeting decisions during the analysis in order to ensure that both parties benefit from the agreement (Jean & Bastien 2012). This will ensure that they maximize the shareholders’ value.
This project entails manufacture and sale of clothes in markets of different developing countries. The major factory will be located in Eldoret, Kenya. Different clothes will be manufactured including jerseys, jackets, T-shirts and trousers. These clothes are expected to be exported to various countries in the world. However, in order to attract more customers, the project will depend on a licensing contract that would involve signing contracts with the world’s best sportsmen (Levy & Judy 2011). This includes football professionals like Cristiano Ronaldo and Lionel Messi. In order to penetrate the English market, Wayne Rooney would be important in marketing of the clothes manufactured. Since most of people in the world identify with sports, a brand containing the name of each of the sportsmen would increase market penetration.
While initiating these brand-licensing contracts, the important legal principles should be considered including the statutory provisions applicable in the respective countries (Thorpe & Bailey 2009). License terms should be clearly defined. This refers to the length of the contract. The terms regarding termination and extent of the agreement should be also defined in this contract (Chevailer &Mazzalovo 2012). Territory is also a prerequisite in brand licensing. It defines the environment in which the product is supposed to be sold. Such an environment should be receptive to a particular brand name used by a company to market its products.
For instance, in order to penetrate the Caribbean market, it is important to use the brand name of Usain Bolt, the world’s fastest sprinter from Jamaica. Clothes with the brand name of the athlete will be easily accepted in the market (Stim 2010). The African market will be easily accessed using the brand name of Didier Drogba. Provisions for renewal of such contracts should be also included in the agreement. After obtaining the trademark, the licensee will distribute the products to various markets without any limitations (Chevailer &Mazzalovo 2012). A fraction of the net sales made will be shared with the licensor as per the contract agreement.
International business risks
In the respective markets, the major challenges that will be faced include recognition of the product among consumers who are not supporters and lovers of a particular sport. In addition to those who don’t like sports, some consumers do not identify with the personalities used to promote the product (Levy & Judy 2011). Since each celebrity has his/her fans, it may be difficult to market the product to those who are not fans of the selected celebrity hence negatively affecting the market demand.
It is also difficult to raise adequate funds to finance the production and marketing activities. Due to the robust marketing strategies involved, it is also difficult to sustain the increased demand (Jean & Bastien 2012). This may lead to increased cases of stock-out costs. Such episodes of stock-outs affect the firm in a negative way due to the challenges related to dealing with disappointed customers. The back order costs associated with the episodes of stock-outs give an edge to the competitors of the company (Stim 2010). This will eventually result into losses suffered by the company.
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Inadequate infrastructure is also a major challenge especially in developing countries. This leads to challenges faced by an organization when transporting commodities to the market. Transportation of commodities in such market environments is associated with enormous costs hence increasing the overall cost of production (Jean & Bastien 2012). Political stability in developing countries is also a major challenge to the success of business operations in such an environment. Due to political unrests, it is difficult to organize production activities in the market. Consumer purchasing power is also affected hence resulting to low sales. Foreign exchange risk also affects organizations involved in international trade (Chevailer &Mazzalovo 2012). This is the fluctuation in exchange rates. Such fluctuations lead to foreign exchange losses hence affecting the overall performance of the organization. Due to diversity in the market environment, losses caused by non-performing branches will be offset against the profits generated by performing branches on the verge of consolidation of the financial statements.
Cultural diversity will also affect the range of products produced by the firm (Stim 2010). This is due to the variations in the acceptable codes of conduct in different societies. Such societies prescribe values including modes of dressing. Some cultures also condemn participation of various members of the population in various sports, which will negatively affect the sales of the company (Jean & Bastien 2012). Government policies enacted in the country of operation will also affect the survival of the business. Adverse policies will lead to reduced sales hence negatively affecting profitability of the firm. For instance, government may levy heavy taxes on foreign products to shield local industries from competition. This thus adversely affects the performance of the business.
In order to overcome such risks, the organization should focus on identification of the values prevailing in the society. A thorough market survey should be conducted with an appropriate feasibility study to determine the expected trends of operations. In addition to using such brands, massive product promotion strategies should be adopted through other advertising media (Chevailer &Mazzalovo 2012). Modern technology should also be embraced in order to ensure that quality production is done. The firm should focus on cost minimization as a method of ensuring that the shareholder value is maximized due to increased profit margins (Levy & Judy 2011). Generated profits should also be invested to finance the increased range of operations as the company advances into new markets.
Partnerships with various governments should also be encouraged in order to enhance the survival of the business (Stim 2010). The firm should be involved in corporate social responsibility in order to enhance acceptability of the products in the market. As the organization engages in activities that improve the welfare of its consumers, customer loyalty will increase hence consumption of the product will increase (Chevailer &Mazzalovo 2012). This boosts sales as well as the overall profitability of the firm. Clear goals should also be set to guide various branch managers of the company. Such goals should be specific, measurable and achievable in order to avoid confusion. Appropriate performance reviews should be done and necessary corrective actions taken at necessary intervals (Jean & Bastien 2012). This should also be associated with hiring of competent personnel and managers to run the operations of the business based on the company`s mission.
Terms of License Agreements
To come to an agreement with the sportsmen, various terms must be clearly defined. Clothes to be produced shall contain the brand names of the sportsmen inscribed on each item produced. Different brands shall be sold in different markets depending on the most popular athlete brand (Gardner 2012). However, other brands shall also constitute about 30% of the total supply in such markets to cater for the minority who do not identify with the dominant athlete in such an environment. Determination of the clothes to be manufactured shall depend on the prevailing customer tastes and preferences in the particular market t (Reese 2011).
A thorough market research will therefore be conducted in order to come up with the best products that would meet consumer tastes and preferences. Proper records shall be kept concerning the quantity of each brand manufactured and sold in order to enhance effective accounting (Gardner 2012). Regular stocktaking shall be done to form the quantity basis for computing royalties that will be paid to the licensor. Royalty payment will be based on the volumes of commodities produced and sold (Jean & Bastien 2012). This shall make up 10% of the contribution margin, which is the excess of the selling price over the variable cost per unit. The fixed costs related to the production of the commodities will be borne by the licensee.
All royalty payments shall be paid to the licensee at the end of the accounting period. Such payments shall be made in terms of the US dollar. The rate applicable shall be the average rate throughout the financial period (Jean & Bastien 2012). This payment shall be remitted on the last day of the third month following the audit of the financial statements of the company (Gardner 2012). The audit work should be done by a multinational audit firm preferably Price Waterhouse Coopers due to its good reputation. c of the audit work, an auditor shall send an audit report to both licensor and licensee. The licensor shall grant exclusive production rights to the licensee hence it will be upon the company to develop the product line and engage in any profit making business (Fox 2008). In case of increased sales and profits of the company, the rate of compensation to the licensor shall be adjusted appropriately.
Quality control measures shall be instilled in the production. This will be enhanced through employment of qualified staff with high levels of competence. Appropriate checks and balances shall also be put in place in order to prevent any misappropriation of the organization’s resources. Standardization of the products shall also be ensured due to the uniformity of the production technology applied by the company (Fox 2008). There shall be no warranties given to the product consumers except where there is proof that the product has not been used by the client. Such sales return shall not be accepted after a period of five working days following the date of sale.
A licensee shall not be entitled to sublicense or transfer of the license to a third party who is not privy to the contract (Thorpe & Bailey 2009). Such actions shall be viewed as a breach of the original contract rendering the licensee liable for damages caused by such a breach. The amount to be paid shall be the full amount of profits made as a result of such a sublicensing agreement. This agreement shall render any prior agreements made regarding licensure null and void (Fox 2008). No other subsequent licensing agreement shall be entered into that will rank more superior to the current agreement. Such an agreement does not however result into any partnership or joint venture between the licensor and the licensee. No contractual obligation exists that binds the parties to proceed with business beyond the duration of the licensure (Gardner 2012). The licensor shall not receive any property and ownership of the company during or after the duration of the contract. Goodwill arising from the license agreement shall be tested for impairment under IAS 36 and the appropriate amount charged to the income statement.
In case of disputes, resolutions shall be done through negotiations. Agents shall represent both the licensor and the licensee. Failure to reach an agreement shall lead to a court case in a bid to resolve the conflict. All parties are obliged to adhere to the laws governing licensing contracts in order to avoid conflicts (Fox 2008). Appropriate measures should be put to avoid the conflicts in future. Legal experts from both sides shall be involved in the interpretation of the licensing law in order to avoid any risks of misinterpretation of the statutory provision. Termination of the contract shall be based on the expiry of the duration of the contract (Gardner 2012). Other grounds for termination shall be based on breach of the contract by any of the parties as well as by a court order (Levy & Judy 2011). In the event of such a termination, all the dues owed to any party shall be settled. Licensing agreements and appropriate legal procedures that should be followed are thus instrumental to the success of a business.