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Taking License

It pays to do your homework before signing a licensing agreement.
December 1, 2004
URL: http://www.entrepreneur.com/article/73762

The Entrepreneur: electrical contractor Kevin O'Rourke, 42

Product Description: The ElectraTrac is an extension cord with electric plugs at every eight feet along its length. O'Rourke originally had the idea back in 1997 as a better cord for holiday lights. Instead of using numerous extension cords or having all the lights go into one plug, the ElectraTrac can be used to plug the lights in at various points along the cord. Customers include consumers, creators of lighting shows, and electrical and construction contractors.

Startup: At least $50,000 in 2001, when the idea was licensed to Reno, Nevada-based Nextep Inc., a consumer marketing company that acquires a wide range of consumer products that can be sold to major retailers. Costs prior to licensing the product included a patent, several rounds of prototypes, an extensive business plan, and some limited production for market testing.

Sales: $10 million projected for 2004

The Challenge: finding the right company to partner with in a licensing arrangement

For inventors who don't have the time or the money to introduce their product on their own, entering into a licensing agreement is an obvious solution. But how do you choose the right company to license your product? Kevin O'Rourke, an inventor in Cleveland, Minnesota, made sure not to rush while searching for just the right licensee for his innovative ElectraTrac electrical cord, which currently sells for $19.99 to $69.95 at stores including Ace Hardware, Lowe's and Target; on home-shopping channel QVC; in catalogs like Herrington; and more. He eventually found the right partner company by taking the following steps.

Steps to Success

1. Take time to develop your product. O'Rourke had a patent, a working prototype and some limited production before introducing his product at the Minnesota Inventors Congress in 1999. According to O'Rourke, "I had considered introducing the product myself, but I was just too busy being an electrical contractor, so I decided to license the product. But I wanted to present the product in the best possible light, so I had a patent, prototype and business plan ready to show potential licensees." Do whatever you can to finalize your product. The odds of licensing your innovation will increase dramatically if it's market-ready.

2. Do thorough research. O'Rourke learned all he could by attending inventors classes at the Minnesota Inventors Congress. "I attended the classes and got some great ideas on what steps I could take to find someone to license my product," he says. Your chances of success will also increase with your knowledge. You can start by taking classes; checking out the United Inventors Association website; reading Inventors' Digest, the industry's leading magazine, as well as books on the topic of licensing (see "Before You Leap . . ." below); and visiting your local Small Business Development Center.

3. Know what you want in a licensee. O'Rourke wanted his licensee to make, sell and distribute his product. But that wasn't all: "I felt the big markets for my product were mass merchandisers and home-shopping networks," he says. "I wanted the licensee company to have experience getting products on QVC and into mass merchandisers." O'Rourke's relationship with Nextep paid off, as the company placed the ElectraTrac on QVC in 2002.

4. Decide how involved you want to be. Do you want an arrangement where the company works with you, or do you want the company to just take over? "I wanted to stay involved with my product," says O'Rourke. "I wasn't interested in a company that just took the product and ran with it."

5. Don't stop until you find the right partner company. After the Minnesota Inventors Congress, O'Rourke chased many leads to find the perfect licensing option. "I got a few contacts from the Minnesota Inventors Congress," he says. "Some of the people I talked to gave me a few names that I pursued. I talked to so many people that I don't even remember who told me about Nextep. I talked to bigger companies, but I felt comfortable with Nextep, which was smaller but still had experience in my key markets."

6. Keep selling. Inventors know their products better than anyone-how and why they work the way they do-and they have a lot of enthusiasm. So don't stop selling, even when the licensee is onboard. "In 2002, I sold my electrical contractor businesses and became the director of professional sales [at Nextep]," says O'Rourke. "Now I work with Brian Davis, president of Nextep, in pursuit of sales through both mine and Nextep's contacts." Other ways to keep selling include making presentations at trade shows, going on home-shopping shows to sell your product, or simply helping the licensee sell to key accounts.

Lessons Learned

1. Sell what you know. Licensees usually prefer inventors with products that they themselves would use in a hobby or a job. When you use your own product, 9 times out of 10 you know exactly what the market wants. When inventors with strong product ideas fail, it's often because some little customer application or need is missed. While licensees who like your product won't rule you out if you're not an end-user, they will be skeptical about whether the product is truly right for the market.

2. Understand your target market. Inventors tend to think in terms of how great their products are, while companies think of customers and markets. You'll impress potential licensees if you show that your product is ideal for your target market and you have no competition, as was the case with the ElectraTrac. If your product isn't unique, you can still show what lines major retailers are carrying, and how and why your product will fit on their shelves. Your chances will improve even more if you know key buyers in the market and can show that they like your product.

3. Assist the licensee whenever possible. Every product faces roadblocks and obstacles. Inventors often believe these obstacles aren't problems for large companies, but that's simply not true. You'll get more deals if you ask what else you can do to move an idea forward rather than just hope the presentation sells the company on your product. O'Rourke collaborated with Nextep in getting approval from Underwriters Laboratories Inc. (UL). The UL certification is required for electrical products that are sold in the home market, and most retailers won't sell a consumer product without UL approval (since they take on liability without it). And if you have an automotive product, for instance, you might need to meet SAE (Society of Automotive Engineers) specifications. What kind of certification does your product need? Market studies, technical responsibilities and product testing are all areas where you can provide assistance.

Before you leap . . .

Setting up a licensing arrangement often involves numerous contracts and agreements. Lawyers' fees can add up, especially if you're dealing with several companies. Before you start the licensing process, read License Your Invention: Sell Your Idea & Protect Your Rights With a Solid Contract (Nolo) by attorney Richard Stim. The book covers contracts and agreements for licensing, and it comes with a CD-ROM of ready-to-use forms. A complementary book that deals with finding potential licensees, deciding whom to contact, giving presentations and making royalty deals is How to License Your Million Dollar Idea (Wiley) by Harvey Reese.


Don Debelak is author of Entrepreneur magazine's Start-Up Guide #1813, Bringing Your Product to Market(www. smallbizbooks.com), and host of inventor-help website www.dondebelak.com.