How do I know if this particular licensing agreement is fair? How do I know if signing it is a good long-term move for my business?

It’s a question I hear a lot. And the truth is, if you’ve never signed a licensing agreement before, there are a ton of nuances and the whole process can be intimidating.

You might have heard horror stories, like:

• Being locked into a deal and even though it’s not profitable not being able to leave
• An artist thinking they were signing a licensing agreement, but handing over their copyrights
• Having a design locked down even though the company isn’t producing it anymore

I get these worries. Licensing agreements can be a great revenue stream for your business.

And unlike many revenue streams, it’s a completely passive revenue stream. Because once you negotiate and sign the contract and deliver the files, you are done.

They are in charge of doing everything to promote and sell the products. And in return, they give you a payment or the privilege of being able to use your stuff.

But no one wants to put in all the effort to create a design, review, and negotiate the contract, only to discover later that you weren’t signing the deal you thought you were signing. But don’t let your fears stop you!

To help you decide if signing this licensing agreement is a good business decision, in this post, I’m sharing five things you should keep in mind.

That way you can focus on growing your business and earning passive income, not being afraid that this deal isn’t what you hoped for.

Let’s dig in.

5 ways you know signing this licensing agreement is a good business decision

I always tell my clients that I can only provide them with the pros and cons of signing a contract. I can tell them which things aren’t industry standard. I can tell them which things we might be able to change. But ultimately, they are the ones who have to decide if signing this licensing agreement is a good decision for their businesses.

To help you decide if you should sign, here are five reasons why it might be a good idea.

Good idea #1: The contract helps you achieve your  business goals

The first question I ask my client before I even look at a contract, is “What are your goals for this contract?”

Because it’s hard to know in the abstract if a contract is good for your business. You have to know what you want the contract to help you do.

If a contract will help you meet those goals, then signing it might be a good idea.

If a contract won’t help or will sidetrack you from your goals, then signing it isn’t a good idea.

It’s as simple as that.

Good idea #2: The contract meets your must-haves (and can’t-haves)

The follow-up question that I ask my clients is, “What must this contract include and what can it not include?”

For example, say my client is working with a craft kit business. And she’s being hired to design a new knitted sock pattern and pair it with the appropriate supplies for them to sell. 

My client knows that the kit business doesn’t have a knit tech editor on staff, so she knows that she’ll have to pay her usual editor to review this pattern out of her pocket. She’ll want to do this to ensure that not only the pattern is correct, but it matches the standards and clear pattern style her audience knows her for. (And as such, will help sell more kits.)

So she might tell me that the contract must include either an advance equal to what she pays her tech editor or that the company will reimburse her/pay it directly, so she’s not out of pocket for that amount.

A common can’t-have is related to existing licenses that my client already has in place. For example, if she has an existing license for kitchen linens, we need to make sure that the licenses granted in this contract, won’t overlap with that license.

If a contract meets your must-haves and can’t-haves, then signing it might be a good idea.

If a contract doesn’t meet your must-haves and can’t-haves, then signing it isn’t a good idea.

Good idea #3: You understand what the legalese of the contract actually means

Now that we’ve covered some non-legal reasons that will help you decide if signing a contract is a good idea, it’s time to cover the most important legal reason.

That you fully understand exactly what the contract says. 

Because if you don’t understand what it says, then you might be agreeing to a different deal than you think you are.

I’ve heard this far too many times over the years. An artist calls me upset because the company she is working with is doing something that she thinks is outside of their contract.

But when I get the contract, I must tell her the bad news. That what they are doing is totally okay under the contract.

Of course, hiring an attorney to review and explain the contract to you is the easiest way to understand what the contract says.

But it doesn’t make financial sense to hire an attorney for every licensing deal. You should hire one if the budget or size of the deal warrants it. But many licensing deals will never make you enough money to cover the cost of the attorney review.

So here are three tips to making sure you understand what that contract actually says if you don’t hire an attorney.

#1. You have a process to review and piece together the contract puzzle.

I like to think of contracts as a puzzle. This is why I print contracts out and use different colored pens to review them. 

The reason I consider contracts a puzzle is because in a contract sections refer to other sections. 

Maybe in Section 1, they define what Products mean and that becomes super important in Section 10 when they talk about the Right of First Refusal.

Or maybe the Term section is related to the Terminations section, which is related to the Notices section.

And when this happens, to understand and put the contract puzzle together, you have to understand how it all links and relates to each other.

Part of my process of reviewing the contract is to write section numbers next to the section that the clause references. Because that helps me piece together the puzzle.

I’ve written before about my full process of reviewing contracts, so if you want to dive deeper and get ideas about how you might create your process, you can read my contract review process here.

#2. You understand the contract legalese

Most licensing contracts are several pages of dense legalese. 

(And to make matters worse, as I previously mentioned it can be challenging to read one clause on its own and understand exactly what it means because so many clauses relate to each other.)

So if you want to get into the world of art licensing, you’ll need to devote some time to learning common legal terms that are included in these contracts and what they mean.

• Head to this blog post to learn 9 common art licensing terms and what common contract sections you’ll see in an art licensing contract.
• The end of your agreement will have a set of legal boilerplate provisions. These are included at the end of almost every contract. And I break standard contract boilerplate down in this blog post.
• Want even more guidance from me? Check out my workshop on how to review and negotiate licensing agreements where I share all my tips and tricks (plus you’ll have the opportunity to leave any questions for me!). Get instant access here for $27.

#3. You understand industry standards

The final tip is to make sure you understand industry standards.

For example, in magazine publishing, a kill fee is often included. But you aren’t going to get that same clause in a surface pattern design contract.

And in a surface pattern design contract, you’ll often have a Right of First Refusal. But this wouldn’t be included in a contract where your illustrations are being licensed for a band’s merchandise.

This is another reason why having an attorney can be helpful since an attorney who regularly negotiates licensing deals will understand these industry standards. But you can also find this out on your own. There are dozens of Facebook and LinkedIn groups where licensing artists trade information about their experiences. These groups can be incredibly helpful for up-to-date information about a particular industry.

Good idea #4: You negotiated anything you need to be changed

One thing I always remind my clients is that a contract is always written in the favor of the party who wrote it.

My job as an attorney is not to look after your best interest, it’s to look after my client’s best interest. My client is the one who’s paying me to write the contract. 

I try to write very fair contracts. And I push back on my clients when they want unfair contracts. But many attorneys do not. They are completely comfortable writing one-sided contracts.

So as you review the contract, it’s important to keep in mind that this contract was not written for your benefit. And that you need to read through it with a critical eye.

And because this contract isn’t written for your benefit, you are likely going to have to negotiate one or more sections of it.

So you need to create a plan of what you want to negotiate so that you feel confident going in. Here are three tips I always keep in mind.

• First, always try to figure out how to frame the change so that it benefits the other side. Why will making this change help them? Or why will it result in a smoother working relationship?
• Practice being in the other side’s shoes. Before I go into a contract negotiation, I try to anticipate the other side’s response to my requests, so that I can prepare and practice what my reply will be. For example, if I’m asking for an advance (and one is not already in the contract), I’ll brainstorm 5 reasons why they might not want it. Then I’ll come up with an answer to each of those reasons and frame it so that the advance benefits them, not just my client.
• Finally, remember that my general rule is that we’ve hit the right balance when nobody’s 100% happy, but nobody’s 100% unhappy. You will win some, and lose some. You have to pick your battles.

Having a negotiation plan, even if it’s just practicing in your head while out for your daily walk, will allow you to feel more confident when you present your contract edits. Because if they push back, you’ll be able to quickly and confidently respond to any of their questions or concerns.

Good idea #5: Your gut says it’s a good decision to sign the contract

Ultimately as I stated in the beginning, you are the only one that can make this decision.

And I tell clients that they need to listen to their gut. 

Does it say that this will help you long-term? If so, then sign it.

Does it say that this won’t be a good long-term move? Then don’t sign it.

While a pros and cons list might help, it ultimately boils down to you stepping into the role of making scary decisions as the CEO of your business. And often your gut is the one that knows best.

That’s a wrap!

I hope this post has helped clarify the process I walk my clients through to help them decide if signing this contract is a good business decision.

Want a little handholding through the process? Then grab a copy of my workshop where I break down the exact legal jargon you’ll find in licensing agreements (and the tricks that companies try to pass off on unsuspecting artists). Get instant access here.