Let's Make a Deal

What You Need

Before trying for a licensing agreement, you'll need the following:

  • Protection: You can't give someone permission to produce something you don't own. A strong, broad patent is essential.
  • Prototype: A prototype is almost always necessary. Companies use licensing to avoid going through the costly development process themselves; they want you to handle the prototype stage for them.
  • Research: To convince the company your product will be successful, you need to present a market research report including:

1. Customer information

  • Number of customers
  • Key buying influences
  • How they buy
  • Where they buy

2. Competitive audit

  • Market share
  • Major strengths
  • Major weaknesses
  • Product opportunities

3. Industry opportunities and threats

4. Key industry trends

Making Contact
When approaching potential licensees, you need two types of contacts. The first are people who will convince a potential licensee that your product is ideal for the market. These include key users, key retailers and key people in the distribution channel. The second type of contact is someone who can "push" your product inside the company you're approaching for a license agreement. This could be a company executive, a regional or national sales manager, a marketing person or the R&D director.

Of the two, your most important contact is the person inside the company. This person can help you fine-tune your proposal, tell you who you have to convince, and offer insights into what you need to do to get the deal done. To meet this kind of contact, you need to get out and attend trade shows, industry events and association meetings. Involve this person as early as possible so he or she can guide you in developing your product in a way the company you're approaching would like. Also, making inside contacts doubles your chances of licensing a product. Without such a contact, you may never successfully pass through the company's invention submission policy to make a presentation.

Presentation Power
First-time inventors often assume businesspeople want nuts-and-bolts demonstrations focusing only on the facts. But they are just as bored by a dry presentation as you would be. Put some showmanship into your pitch to get them excited. You've worked hard to get in the door, so don't be reluctant to spend a few thousand dollars on creating a stellar presentation.

  • The Opening: Knock their socks off by showing end users who are excited about your product. Videotape testimonials, show people using the product, or use before-and-after pictures that show how well the product works.
  • The Details: Once they're interested, move smoothly but quickly through the details, including market research, your target customer, the distribution channel, projected profitability and why your product is a good fit with the company's product line.
  • The Proposal: Don't make a formal offer. Instead, say something like: "I feel you are the best company to promote my idea, and I'm open to any type of partnership that works for you-from buying the product for private-label sale to signing a license." If they don't suggest a next step, offer to work with someone in the company to propose next steps for evaluating your product.
Don't go into licensing with blinders on. Here's what to expect when you attempt to get a licensing agreement:
  • People may treat you like a crackpot inventor unless you have a product and a prototype.
  • You'll probably meet some resistance from R&D departments.
  • Your first presentation will determine whether you'll get the company interested in your product idea.
  • The initial licensing agreement the company offers will most likely be unfavorable.
  • You'll need an attorney to help you negotiate a fair deal.
  • Once the deal is finally signed, don't count on the licensing company to keep you well-informed about your product's progress toward introduction.
  • After the advance, you probably won't see your first royalty check for 18 to 24 months.
  • The company may make substantial changes to the product before introduction.
  • Most people will never know you are the inventor of the product. The company certainly won't be the first to tell anyone.
  • If your product is a success, you can receive regular quarterly royalty payments for five to 10 years.
  • You'll need to keep active in the market if you plan on presenting additional products for licensing to industry companies.

Adapted from Think Big: Nine Ways to Make Millions From Your Ideas (Entrepreneur Press) by Don Debelak

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This article was originally published in the June 2003 print edition of Entrepreneur's StartUps with the headline: Let's Make a Deal.

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