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Let's Make a Deal

Licensing your idea to a bigger company can mean fewer hassles--and a lot more money in your pocket.
June 1, 2003
URL: http://www.entrepreneur.com/article/62196

Would you like to profit from your idea without having to start your own company, worry about manufacturing or handle the expenses of marketing your product? Consider licensing.

Licensing means the owner of intellectual property (a patent, trademark, copyright or trade secret) gives someone else permission to produce the product related to that property. In return, the inventor is paid a royalty (typically 2 to 8 percent of sales). One company I worked with signed a licensing agreement with the inventor of a vibrating dental scaler. Over 10 years, the inventor's 8 percent royalty amounted to more than $30 million. Not bad for an investment of $15,000 for a patent and a rough prototype.

Licensing can be ideal if you don't have the desire or expertise to market your product. It lets you take advantage of the marketing power of a large firm and enables you to concentrate on creating more products instead of working on marketing or operations.

On the downside, once you license a product, you have no control over what the licensee does with it. The company may change the product, fail to promote it or even drop it after a few years. There's also the risk that, while investigating your idea, the licensee may decide your patent is weak and design its own version of the product.

Money Matters
While licensing does save you the expense of launching and marketing your product, it still requires some capital. Typically you need, at minimum, a patent, a prototype and research that shows there is a market for your product. If you can't finance these steps yourself, you'll need to seek an investor or partner. Partnering with a product designer, prototype engineer or small manufacturer can be a good way to share some of the financial burden while getting help with the design and manufacturing stages.

Virtually any type of product can be licensed. What varies is the stage at which a company will license the product. You may be able to strike an agreement quickly if you are already successfully producing and selling the product. You may be able to license a product with just a prototype if it meets a clear market need in a convincing way. In some cases, you may even be able to license an idea in the concept stage if the product has breakthrough potential in a major market. The key word is "may." Licensing a product in the concept stage is highly unlikely. The further along your product is, the better your chances of licensing success. Try to take your product as far as you can before approaching potential licensees.

INSIDE SCOOP
To get a license, you need to learn about your industry-inside and out. Learn who the major players are in your market and which companies are most likely to sign a licensing deal. Keep up with trade magazines and attend trade shows and association meetings. You'll also need a patent attorney with licensing expertise. Here are some helpful resources:
  • Licensing Executives Society, a network of licensing professionals, publishes a magazine and other publications related to licensing; (703) 836-3106, www.usa-canada.les.org
  • Thomas Register of American Manufacturers, available at most public libraries and at www.thomasregister.com
  • United Inventors Association of the United States of America, P.O. Box 23447, Rochester, NY 14692; (585) 359-9310; www.uiausa.com

What You Need

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

1. Customer information


2. Competitive audit


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.

GREAT EXPECTATIONS
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