Licensing can be lucrative for small business owners who use these tips to protect their ideas.
Licensing can be a profitable option for solo entrepreneurs, inventors, and many small business owners. It is essentially an agreement between you (the licensor) and another party (the licensee) to take your product to market. In return you receive a lump sum or royalty payments for each item sold.
Pros and cons
As a licensor, you benefit by having someone else assume the responsibility for manufacturing, marketing, and distributing your product. This is especially attractive to “serial entrepreneurs” who like to develop one product, sell it, and move on to the next.
Licensing also makes sense for products that can be sold to multiple other companies, for example sports-related items. Rather than approaching all the major league teams, you work out a licensing agreement with one company who already has a deal with the league.
The drawbacks to licensing can be a loss of control over production and quality. And, of course, you are limited to a percentage of the profits. However, by following some basic tips, you can reduce your risk and maximize your profits.
Tips for seeking a licensee
Finding a company interested in licensing your product is far from a slam-dunk. Only a small percentage land successful deals. To improve your chances:
Don’t assume the prospective licensee will intuitively see how your product works or how it fits with their existing products
- Broaden your vision. Don’t just know your product. Know your industry. Research the types of companies that are promising licensing partners, so you can talk to them at their level.
- Polish your presentation. If you’re fortunate enough to get that all-important presentation, be thorough. Don’t assume the prospective licensee will intuitively see how your product works or how it fits with their existing products. Be able to speak knowledgably about your market and your competition.
- Have your patents in order. Many companies will not be willing to talk to you unless you already have a patent issued for your product. The patent process can take time, so apply as soon as you can.
In addition to protecting your ideas with patents, you should always protect yourself:
- Have an intellectual property attorney in your corner. He or she will guide you through the details of confidentiality agreements and your licensing agreement. This is definitely not a do-it-yourself project.
- Follow the plan. When you submit a product to a potential licensee follow their instructions to the letter. Any changes or shortcuts on your part can kill your deal.
- Turn negatives into positives. Even if your product is ultimately turned down, you can use this as an opportunity to learn and improve. Find out why were turned down and how those obstacles could be overcome in the future.
Basics of a licensing agreement
These are some of the elements many licensing agreements contain. However, to protect your rights, be sure to have your attorney involved in every stage of the process.
Performance. Spell out the performance requirements of the licensee such as sales goals. If the licensee doesn’t live up to the agreement, you’ll be able to terminate it.
Exclusivity. If your licensee agrees to an exclusivity clause they will not be able to take on one of your competitors as another licensor.
Distributors. Licensees often hire outside distributors in order to improve sales. To protect yourself make you should have approval over distributors.
Liability. Spell out who is liable in event of product failures, recalls, etc.
Licensing isn’t simple, but if can be highly lucrative for people who understand the process and know how to protect their interests.
Kelly Burkart is a freelance writer from Minneapolis, Minn. While she has spent most of her time writing about financial services the past 15 years, she has also explored and written about everything from cardiovascular health to travel, higher education and sustainable energy practices.