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Pinpointing Key Issues in Licensing Agreements

January 26, 2016
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Author: Lucas LaChance, CPA, CIA and Director at LGT

As the economy slowly crawls back, many not-for-profits (“NFPs”) are still experiencing stagnant or even declining revenues, prompting them to look to nontraditional types of revenue sources—including licensing agreements.

Large organizations, such as the American Red Cross and the Girl Scouts of America, have been in the licensing game for quite some time. But licensing arrangements aren’t only for the behemoths. With the requisite amount of care (and legal advice), your organization, too, might be able to both generate revenue and further its mission by improving awareness of its brand.

 

 

Consider the Brand

Of course, licensing your name or trademark to commercial companies to use on their products could help or hurt your brand. For that reason, you’ll want to conduct due diligence on any prospective licensees to reduce the risk of the arrangement going awry.

In addition to confirming that a licensee has no skeletons in its closet, you also need to consider whether your organization’s mission and values align with those of the licensee. One potential licensee might offer significantly higher royalties than another, but if the former’s products undermine your brand image or mission, you’ll lose more than you gain in the long run.

The American Medical Association (“AMA”) learned that the hard way years ago when it entered into an exclusive five-year licensing deal with Sunbeam Corporation to use the AMA’s endorsement and logo on home health care products such as thermometers, air cleaners, and vaporizers. The AMA pulled out of the deal after public outcry over conflict of interest and commercialism. The organization ended up paying Sunbeam almost $10 million to settle after the corporation sued the AMA for breach of contract.

You also can protect your brand by including provisions in the agreement addressing conditions of use, quality control standards, and termination rights. And it’s vital that your organization monitor licensees’ use of your name or trademark throughout the entire period covered by the agreement.

Play a Passive Role

Fortunately, NFPs enjoy a royalty exclusion that generally prevents licensing revenues from being subject to unrelated business income taxes (“UBIT”)—as long as the NFP plays a passive role. You shouldn’t actively provide services to the licensee, but you may actively protect your brand or logo that is being licensed. And you shouldn’t receive compensation based on the licensee’s sales.

Take Practical Steps

While the possible benefits are substantial, so are the required resources. You’ll need to allocate staff to perform a comprehensive evaluation of your brand and its place in the marketplace, develop marketing strategies to locate and land appropriate prospects, and keep an eye on licensees’ uses of your intellectual property on an ongoing basis. You also should retain legal counsel to review all agreements.

The resource-intensive nature of licensing prompts some NFPs to outsource it to a consultant. This option allows the organization to focus on its core mission-related functions while still enjoying the benefits. If you pursue this route, you can expect to pay an upfront fee for strategy development, with possibly a monthly retainer and a percentage of the royalties the consultant secures.

Explore the Possibilities

You might be surprised at the value commercial companies and consumers attach to your organization’s brand. If you find interest from potential licensees, your financial and legal advisors can help you determine an appropriate licensing strategy.

 

Seek the services of a legal or tax adviser before implementing any ideas contained in this blog. To reach a financial advisor at Lane Gorman Trubitt PLLC, call (214) 871.7500 or email askus@lgt-cpa.com.

 

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From → Not-for-Profit

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