1. Is the name you want to license better known by your prospective audience (not the audience you already have) than is yours (we’ll use “Joe’s” as an example)? This includes people who might be traveling to your city.
The point of licensing is to attract customers that may not have come to “Joe’s.” While your existing customers may come more often or spend more each visit if you change your name and image, the prime focus is on new customers who, when asked which name is more familiar to them, “Joe’s” or the name you are considering licensing, say the license name.
2. If the answer is yes, then is the name you want to license the kind of name that would make your prospective audience want to visit your establishment?
Having a well-known name is one thing, but it is unlikely that any business today would want to change its name to “Enron” just because it’s well-known. Do your prospective customers have an image of the licensed name that would make them choose a club with that name over “Joe’s”? It’s the same question a hamburger shop would ask when deciding whether to keep its current name, “Joe’s Burgers,” or get a McDonald’s franchise. Some people may choose “Joe’s Burgers” to be different or to avoid what they think is the cookie cutter “Big Mac;” but most people who are unfamiliar with “Joe’s Burgers” would choose McDonald’s.
3. If yes, is the name you want to license and its image consistent with your present establishment or will you have to make changes? Will those changes significantly affect your business? Will you be comfortable with those changes?
Sometimes, when you license a name for your business, your goal is to add to your existing customer base. Other times, your goal is to completely change your audience. Just consider that if “Joe’s” customers like to drink $1 beers, changing your club to a $4 beer club will likely alienate your existing customer base. In a situation like that, you will, essentially, be starting from scratch; and the name you license could be critical to avoiding a slow start. Further, you should consider whether the new style business will be consistent with what you are comfortable with personally.
4. If you were to enter into a license for the name you’ve been considering, will the licensor do anything to help you? Marketing? Promotion? Product?
There are always trade-offs and costs. But if you are paying roughly the same amount for two different names, the more valuable name is the one that results in more business and profits for you … and that’s a combination of pure star power of the name plus all the other things that go with it. Things like advertising, coordinated events, product support, cost reduction and others. Is it necessary to get all of this? No, but if you want to get your money’s worth and have the best possible chance of making your licensing experience a success, ask your licensor what he’ll do for you besides a name.
5. Does the licensor take licensing (and you) seriously, or is the attitude more like “It’s free money, and we shouldn’t have to do anything for it”?
A successful licensing experience starts with the licensor, not the licensee. A good licensor is one that gives extensive thought and planning to how their name can help you, and they know how to listen to what your goals are. A good licensor wants its licensees to succeed and will accept a licensee only if there’s a good chance of being successful. A bad licensor just wants anyone who will pay them a fee. What does your licensor want?
6. Last, but not least, do you make more money with the license than without it?
Sometimes, being a licensee within a larger network provides a lot of cooperative efforts, support and intangible benefits. However, ultimately, the level of profits is still the biggest factor in licensing. Excluding cost savings that your licensor might help you achieve, here is the formula to determine percentage your revenues must increase to break even on the royalty.
(Gross profit margin/(gross profit margin – royalty rate) – 1) x 100 = % increase to break even
For example, if the gross profit margin is 80% and the royalty rate is 5%, the breakeven increase would be 6.67% determined as follows:
1. .8/(.8-.05) = 1.0667
2. 1.0667 – 1 = .0667
3. .0667 x 100 = 6.67%
So, in this example, if you believe you can realize an increase in revenues more than 6.67% percent, that’s why you might want a license.