Best Practices for Licensing Brands in New Markets

As the industry continues to grow, more brands are exploring licensing models to expand into new markets without violating restrictions on interstate commerce. Whether it’s through traditional licensing, revenue-sharing, or profit-sharing agreements, companies are finding innovative ways to reach new consumers while minimizing financial risk.

This blog outlines the best practices for brand licensing, key differences between licensing models, and how to choose the right partners when entering new markets. For a deeper dive, check out MJBizDaily’s original article, which features insights from industry leaders and legal experts.

1. Common Licensing Models in the Industry

With federal restrictions still limiting interstate commerce, brand licensing has emerged as a crucial strategy for growth. However, not all licensing models are created equal. Here’s a breakdown of the three primary licensing models used by businesses today:

a. Traditional Licensing

Under traditional licensing, the licensee pays a fee to the brand owner for the right to use their intellectual property, products, or brand name. This typically involves an upfront fee and ongoing royalty payments based on sales.

Pros:

• Simple to manage.
• Easy to scale across multiple markets.
• Minimal involvement in the licensee’s operations.

Cons:

• The brand assumes less financial risk but has less control over product quality and market positioning.
• If the licensee underperforms, the brand’s reputation may suffer.

This model works well for companies that want to maintain a lean structure while expanding quickly, such as Old Pal, a California-based brand.

b. Revenue-Sharing Agreements

In a revenue sharing model, both the brand and the licensee share total revenue generated, making it a more collaborative arrangement. This approach ensures that both parties are equally invested in the venture’s success.

Sabrina Wheeler, COO of Stone Road, noted that switching to a revenue sharing model allowed the company to:

“Put everybody in a more collaborative position.”

This model reduces upfront financial risk for the licensee while incentivizing both sides to maximize revenue. However, because revenue-sharing ties payments directly to sales, brands must stay more involved in the day-to-day operations.

c. Profit-Sharing Agreements

In profit-sharing agreements, only the net profits are shared between the brand and licensee after expenses are deducted. This model works best when both parties have a close relationship and can maintain transparency.

Pros:

• Aligns incentives by focusing on profitability rather than just sales.
• Ensures both parties share financial risks and rewards.

Cons:

• Requires detailed accounting and trust between partners.
• More complex to manage, making it difficult to scale across multiple markets.

Avis Bulbulyan, CEO of Siva Consulting, cautioned that while profit-sharing can work well in specific cases, it involves opening the books and increased accounting complexities:

“It’s not just a one-way transaction, but in the end, it’s still a licensing deal.”

2. Vetting Potential Partners

Choosing the right partners is one of the most critical steps in expanding through licensing. Poorly vetted partnerships can lead to underwhelming sales, damaged brand reputation, and regulatory issues.

Sabrina Wheeler of Stone Road shared that her company typically vets up to 20 potential partners before selecting one:

“Some are receptive, some are not. Some think there’s more value to creating an in-house brand.”

When evaluating potential partners, consider the following factors:

• Market Experience: Does the potential partner have a track record of success in the market?
• Financial Stability: Are they capable of meeting licensing fees and investing in marketing?
• Regulatory Compliance: Are they familiar with and capable of complying with local regulations?
• Cultural Fit: Do they align with your brand’s values and vision?

For more information on compliance, visit the California Department of Control.

3. Benefits of Licensing for Brands

While licensing isn’t right for every company, it offers numerous benefits for those looking to expand into new markets without incurring the high costs of direct operations.

Key Benefits:

• Faster Market Entry: Licensing allows brands to enter new markets quickly by leveraging existing infrastructure and local expertise.
• Lower Operational Costs: Since the licensee assumes most operational responsibilities, the brand can focus on marketing and product development.
• Revenue Diversification: Licensing provides an additional revenue stream without significant capital investment.

Justin Brandt, founding partner of Bianchi & Brandt, emphasized the importance of forming partnerships with well-established operators:

“It would be smarter to do a joint venture in this situation to help get your foot in the door, rather than starting from scratch.”

4. Challenges of Scaling Licensing Agreements

While licensing offers clear advantages, it’s not without challenges. Brands looking to scale nationally must navigate a patchwork of state regulations, ensuring compliance in each market.

Rusty Wilenkin, CEO of Old Pal, noted that while profit-sharing might work in a few select markets, scaling it nationally would be difficult:

“The licensing model for pure-play brands has been really great – it’s easy to manage with a small team.”

Additionally, maintaining consistent product quality across multiple markets requires ongoing communication and oversight. Brands must invest in:

• Quality control protocols.
• Ongoing training for partners.
• Regular audits to ensure compliance with brand standards.

Expanding Through Licensing

With federal restrictions on interstate commerce likely to remain in place for the foreseeable future, licensing will continue to play a crucial role in the industry’s growth. By carefully selecting partners, choosing the right licensing model, and maintaining oversight, brands can successfully expand into new markets while minimizing financial risks.

Whether you’re considering licensing your brand or looking for top-tier extraction solutions, Advanced Extraction Labs offers customizable, compliant solutions designed to meet your business needs.

For more expert insights on brand licensing, visit MJBizDaily’s full article. Or for other news, check out our post on tax revenue collection for more.