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A Surefire Way to Get a Licensing Agreement

Prove that your product is a low-risk investment.
January 14, 2010
URL: http://www.entrepreneur.com/article/204604

One of the challenges of writing a column on inventing is the breadth of the topic. Not only does this speak to people in the idea stage but also to those who exhibit complete products at trade shows or ship units to Walmart or QVC. It also includes a diversity of products ranging from software applications to beauty applications to the latest sporting goods innovation.

However, many inventors contact my company looking for guidance on licensing their inventions to manufacturers. Disclaimer: My company licenses inventions.

Much has changed in the four years since I wrote my first book, the Mom Inventors Handbook. Licensing agreements are certainly more common now than in the past and definitely open to more inventors. This has also increased the number of inventors approaching manufacturers and, hence, the competition. Of course, with competition come other challenges. Terms are not as rich as they have been historically. And from what I've seen, those with the most demonstrable likelihood of success--that is, those with a concept that's well-developed and researched--most often secure deals.

Historically, tremendous care and expense have been put into the development and filing of patents. After all, this is among the assets granted in return for a licensing agreement. Next, quality prototypes have been great in illustrating a product's effectiveness and cleverness. These items can still be useful, valuable and worth creating. However, if you want a guaranteed licensing agreement, there is one thing you need to get: a customer.

More than ever before--and as a manufacturer I can speak to this firsthand--manufacturers are looking to expand their presence inside retailers and grow revenue quickly, while simultaneously avoiding risk.

Consider the reality of what manufacturers are facing today. With the merging or demise of many retailers and the increased strength and geographic ubiquity of a small number of mass retailers, retail distribution options for manufacturers have decreased. In the current economy, many retailers have attempted to reduce SKU numbers as well as vendors. Additionally, major retailers have launched store brands, reducing floor space for products to as little as a third of what they used to be. The value of a customer has never been higher. The solution is to add value and reduce risk by doing some of the work the manufacturer would have to do.

Here's the guarantee:
If you want to get the attention of a licensee, before you even talk about your product, pitch the prospect your new customer, your growing sales or the commitment from a major buyer. You'll get an appointment, and your product will magically move to the front of the line in the new product development funnel. In fact, once you have this to offer, the strength--or even the existence--of your patent will probably not even come up as long as your product does not infringe on existing patents.

Herein lies the challenge--and the opportunity.

The opportunity is that very few people will muster the energy, creativity and guile to make this happen. After all, it is one thing to pay someone else to write and file a patent. There's an entirely different level of effort involved in creating a product with real sales, or at least the retail demand for a product in production.

Three suggestions for making this happen:

  1. Assess the complexity of your product. Is there a way to get a working version developed without extensive costs? If not, perhaps you should consider your second-best, less-costly product idea. Most inventors are innately creative and have more than one idea.
  2. Identify manufacturers. Find out which manufacturers currently sell product lines to large retailers where you can see that your product would be a fit.
  3. Create a prototype (Plan A). Create a "finished-looking" version of your product (this is actually a prototype but call it a product) and pitch retail buyers. The goal is to get a commitment before you actually launch. Maybe even offer them a few months of launch exclusivity. At least as important as the prototype, if not more so, is the mock-up of your packaging. Your product must look as retail ready as possible. If there are shortcomings, use them as an advantage, e.g., "my packaging is in the process of being redesigned so any suggestions for improvements would be welcome at this time."
  4. Develop your product (Plan B). If you can't get a commitment, it's time for the development and launch phase. Develop your product, attend a trade show and generate demand. This is a higher-risk approach due to the time and capital investment involved. But if the end goal is licensing, avoid every unnecessary business-building cost possible. This approach requires more resources and involves more risk than Plan A, so it will require a well-thought-out business plan.
  5. Be clear on your own goals. Once a buyer places an order, a new friend enters the scene: greed. At this point you will likely ask yourself whether you should just go ahead and become a manufacturer rather than share the spoils with another company. This is a great problem to have and a worthwhile consideration. However, since the complex process of weighing the pros and cons of each option are fodder for another column, I will just say that the benefits of licensing remain intact in spite of early success.