Generating Revenue Through Licensing Arrangements
In this pandemic year, many not-for-profits are scrambling to find new sources of revenue to replace donor contributions and other lost income. If this sounds like your charity, you might want to consider licensing your name and brand to a for-profit business.
When licensing arrangements work, both charities and companies can experience significant benefits. One example is AARP, which licenses its name to a variety of companies, including UnitedHealthcare, The Hartford and ExxonMobil. But such arrangements can also cause problems. For example, if a product “endorsed” by a nonprofit is found to be ineffective or harmful, the nonprofit may suffer by association. By the same token, a nonprofit mired in controversy could harm the public perception of a product or service bearing its name.
To ensure a license arrangement doesn’t become a public relations problem, thoroughly research any potential partner’s business, products and the backgrounds of its principals. Also confirm that your mission and values align. If you determine that a potential licensee’s products or services have the potential to undermine your brand, take a pass — no matter how high the promised royalties.
Look before you leap
Work with your attorney to include certain provisions in any license agreement. Specify how the licensee can use your name and brand, mandate quality control standards and detail termination rights. And realize that signing the agreement doesn’t end your responsibility — you’ll need to actively monitor the licensee’s use of your name and intellectual property throughout the agreement period. If it sounds like all this will require additional staff time, you’re right.
In fact, the resource-intensive nature of licensing leads some nonprofits to outsource the work. Outsourcing allows your organization to focus on its mission, but you’ll probably pay upfront fees, a monthly retainer and a percentage of the royalties that your consultant secures. So, it’s important to crunch the numbers and make sure your license arrangement is worth this expense and effort.
Don’t forget the tax implications of licensing. Nonprofits enjoy a royalty exclusion that generally exempts licensing revenues from unrelated business income taxes (UBIT). But certain arrangements can jeopardize this. You can’t receive compensation based on your licensee’s net sales — only on gross sales. And you must play a passive role, meaning you don’t actively provide services to the licensee.
Make a positive impression
Any licensing arrangement your nonprofit enters should generate revenue and, probably even more important, promote a positive impression of your brand. To ensure you meet both goals, consult an attorney about legal details and us for financial advice.