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Licensing Your Invention vs. Going Into Business

Have an idea but not sure what to do with it? Our expert explains which money-making option is right for you.
December 12, 2005
URL: http://www.entrepreneur.com/article/81596

During the invention process you'll encounter an early fork in the road: should you go into business for yourself, or should you try to license your idea to an already established company or manufacturer? There are many factors to consider when making this decision, and this column will help you evaluate the pros and cons of each.

First it's important to understand these two options. When you go into business yourself, you'll handle every step of the process--from creating a working prototype to overseeing the manufacturing to devising a marketing plan to sales to distribution. When you license your invention, most of these steps are taken on by the licensee and you're paid a royalty on net sales of the completed invention. Running your own business demands a greater commitment and tolerance for risk with the promise of greater rewards, while licensing your idea minimizes your risk, and also your financial return.

As you consider your decision to go into to business vs. licensing your idea, there are three main factors to consider:

  1. Your goals
  2. Your available resources
  3. Your tolerance for risk and expectation for rewards

Your Goals
When considering your goals, it's important to figure out what, exactly, will suit your lifestyle, your interests and your overall psychology. This will help determine whether owning your own business is right for you--or if the invention process alone is where your interests lie. Ask yourself the following questions:

Available Resources
Next it's important to consider what resources are available to you. That means evaluating not only your tangible resources, but also your innate resources, like your talents and abilities. Ask yourself:

Risk vs. Rewards
Finally, you should evaluate your tolerance for risk and measure your desire for rewards. On one hand, about half of all small businesses fail within the first four years. On the other hand, the potential benefits of a successful business--being your own boss, setting your own hours, and reaping financial rewards--may outweigh the fear of losing your initial investment. Ask yourself:

A Comparison

It can also help to do a side-by-side comparison of the steps involved for each option: running your own business vs. licensing your idea. It's useful to understand exactly how much work defines each option in order to conclude if they're tasks you're willing (and eager) to take. Below is a partial list of steps you'll need to take when pursuing each path.

Administrative Going into business:

Licensing your invention:

Product Development
Going into business:

Licensing your invention:

Marketing
Going into business:

Licensing your invention:

Sales
Going into business:

Licensing your invention:

Fulfillment
Going into business:

Licensing your invention:
n/a

Legal
Going into business:

Licensing your invention:

Financial Risk
Going into business:

Licensing your invention:

Financial Gain
oing into business:

Licensing your invention:

Time Horizon
Going into business:

Licensing your invention:

Ask the Experts
After evaluating each possible path yourself, I recommend getting some expert support to help make your decision. Consult a trusted friend or relative who has analytic and business experience, or take advantage of free resources such as the local Small Business Development Center of the U.S. Small Business Administration ( www.sba.gov ), your local SCORE (Service Corps of Retired Executives) chapter ( www.score.org ), or another professional business support group. These groups offer free consulting sessions with experienced business advisors. Another valuable tool that can help is the One Page Business Plan workbook by Jim Horan (download a free template at www.onepagebusinessplan.com ). Or check out Entrepreneur's "How to Build a Business Plan " guide.

Conclusion
Taking a product from concept to market is an enormous commitment of time, energy and money. Of course, if successful, the financial rewards and personal gratification can be well worth the effort.

On the other hand, you may not have the time, financial resources or personal interest for setting up a full-fledged business. Perhaps you love developing ideas--but not the prospect of all the sales, marketing and administrative work that goes with it. If so, the licensing route may be the best direction for your invention. Ultimately, only you can decide--with the help of experts in your field. Consider and analyze each option carefully, and best of luck!