This Small Business wants to License Art
In looking for new ways to partner with local Artists and Designers, it was time to investigate Licensing. I discovered the majority of information is geared toward the Artist and not the Licensee. There is very little instructive information on how to License Art as a small business. As a result, I decided to share my findings in the hope that the info might be of assistance to some other small business owners.
How to Access Art
There are generally 3 ways a small business can access art for manufacturing purposes:-
- In-house designers who are paid a salary to design art for products
- Buy art out-right. The piece is sold upfront and the manufacturer can then do whatever they like with the image.
- The art is used under a Licensing Agreement.
What is Art Licensing?
Visual Artists are often geared toward selling original work, and it may be that reproduction does not fit their ethos, but many artists have a stream of income from licensing. This allows their images to be reproduced by other entities in exchange for royalty payments.
There are many organisations and agencies assisting the licensing process for Artists. This is important as not all royalty contracts are created equal. Negotiating a good deal and then being able to monitor the ongoing process is key for the financial success of many creatively talented folk. Likewise, it is important that the Licensee negotiates a commercially viable agreement.
The Advantages of Licensing Art
- No salary, benefits or annual leave to pay.
- Royalties are paid according to sales so payments are based on the success of the product.
- It allows the manufacturer to work with many different artists without having them on the payroll.
- A cost-effective way of accessing a variety of styles and techniques.
- Can piggy-back on the artist’s name and reputation if they are well known.
Art Licensing Types
The artwork may only be used by you, the (licensee/manufacturer), and the Artist may not reproduce, sell, or give the artwork away for free. An exclusive license is may be time-bound, for example, a three-year duration.
You receive the right to use this artwork, however, the artist can also license the artwork to other people, and can use it for their own commercial purposes.
Licensing Agreement Content
This is calculated by multiplying the royalty rate against net sales. For example, a royalty rate of 5% multiplied by net sales of $1000 equals a net sales royalty of $50.
Below are some royalty estimates:-
- Greeting cards and gift wrap: 2% to 5%
- Household items such as cups, sheets, towels: 3% to 8%
- Fabrics, apparel (T-shirts, caps, decals): 2% to 10%
- Posters and prints: 10% or more
Per unit Royalty
This royalty is tied to the number of units sold or manufactured, not the total money earned by sales. For example, the royalty may be 50c for each licensed product sold or manufactured.
Demanding a Guaranteed Minimum Annual Royalty Payment
If you want a long-term license, you may consider a “GMAR” (guaranteed minimum annual royalty payment. Here you would pay a specified amount at the beginning of each year or period, regardless of merchandising or sales. At the end of the period, if royalties exceed the GMAR, you pay the artists the difference owing. You also bear any loss if the GMAR is not achieved.
Auditing Royalty Income
Unless there the relationship between Licensee and Artist is trusting, there may be a provision in the agreement for auditing to take place.
This provision would:-
- describe when the Artist or representative can access your records, and
- provide that if the audit uncovers an error of a certain magnitude—commonly a sum between $500 and $2,000— you have to not only compensate the artist for the shortfall, but also for the cost of the audit.
The artist may request a provision for attorney fee payment or reimbursement to cover them in the event there is any legal dispute relating to the Licensing Agreement.
Once a licensing agreement has been signed, royalty payment is either in lump-sum or a continuing payment (monthly, quarterly), based upon the percentage of the income contract.
Advance Against Royalties
An “advance” may be paid at the time the license agreement is signed. It is almost always recouped against future royalties unless the agreement specifies otherwise. This option of paying an advance provides a good incentive to the Artist.
Be aware that if you advance $1000, for instance, but your margin on sales does not achieve this amount, you (the licensee/manufacturer) bears the loss.
One-time License Fee
It is rare, but a one-time licensee fee at the time of signing the agreement may be negotiated. This is not an advance, nor is it deducted from royalties. This is generally a one-time payment to cover all future use of the image.
An organisation of significance I came across is Arts Law. This is a national Australian community legal centre for the Arts. This not-for-profit independent organization is on a mission to empower artists and creative communities through the law. With 84.6% of the copyright transactional licensing royalties being paid to the artists, this is a stand-up organisation doing good things for the Arts industry.
An interesting resource available is the Artwork Reproduction Licence – Merchandise. This is a sample to be used when a third party wishes to manufacture and sell merchandise with an Artist’s artwork on it. The cost is $500 for non-members.
What Will Jimmy Do?
I don’t pay for one-on-one legal advice for my small business unless it is absolutely necessary (no offence intended if you’re a legal eagle). At this stage my process will be:-
- Find an Artist(s) that resonates with our brand.
- Commission a piece specifically to fit with our brand and/or product, and pay the commission fee for the unique work.
- Negotiate the terms of a Licensing Agreement for continued use of the image.
- Purchase an Artwork Reproduction License Template and adjust it according to the negotiated terms.
- Ensure the Artist seeks their own legal advice prior to signing the agreement.
- Seek legal advice if there is any negotiation points of concern.
- Sign on the dotted line once both parties are happy to proceed.