Catalog Licensing Agreement Questions Answered

A reader of the most recent M&A:Q&A asks: “How long is the typical term of the licensing agreement in these deals? Do they go on forever, as long as either party does not breach? What’s the risk to Blue Sky of investing in these deals and then losing the license in five to seven years?” (Click here for original column)

Larry West responds:
License agreements are typically for an initial term of three to five years, with co-renewal rights. Some can be as long as 10 years. Others, similar to these, can be renewed in perpetuity.

Having said that, you’re right, the ultimate term depends on the lack of a breach, by either party.

I don’t see any obvious risk to BlueSky of investing heavily and then losing the license at the end of the term.

The reasons are multiple, including that if the agreement generates good ROI for both parties, there is no incentive for the nonprofit organization to exit — that is, to leave partnership with a highly experienced direct marketer like BlueSky, which would retain the largest economies of scale (i.e. a prime reason for the deal in the first place), and a goodly part of the other expertise/assets (such as other modeled customer lists within BlueSky — for prospecting by the nonprofit) that would remain solely within BlueSky.

In addition, if a nonprofit were to withdraw from such a license agreement, it would lose another critically important metric: a guaranteed, no risk, cash flow.

Finally, it seems to me the risk in a licensing agreement is roughly similar to that of an acquisition. One invests, builds and sweats, and with luck and a prayer, succeeds (or fails) down the road. There are no free lunches.