Pump Up The Value
Apply now to be an Entrepreneur 360™ company. Let us tell the world your success story. Get Started »
Many letters and phone calls I receive go something like this: "Ms. Edmark, I have this great idea, and I just know millions of people will buy it. If you develop and market it, I'm willing to split the profits with you 50/50. What do you say?"
I always say, "No."
Those letters and calls always remind me of the story of a man in New York City who was selling apples on the corner for $100,000 each. When asked how he expected to sell any, since his apples were so expensive, he answered, "But I only have to sell one."
The apple vendor is as unrealistic in his expectations as any entrepreneur who thinks a potential buyer would agree to develop and market a product for just 50 percent of the profits. The entrepreneur who thinks up the idea has provided only one piece of a very complicated and time-consuming puzzle.
An idea is worth very little if it is nothing more than a concept and has not yet been proved. The good news is, there are plenty of things you can do to make your idea more valuable--and thus more likely to be purchased by a buyer or licensee.
Your idea is likely to have more moneymaking potential and thus be more valuable to a prospective buyer or licensee if it is patented. In fact, many companies won't even talk to you about buying your idea unless you already have a patent, have filed for one, or can prove that one is attainable. The reason is simple: Patents give the holders the right to stop anyone else from making, using or selling their ideas without their permission.
Without a patent, anyone can duplicate your idea and sell it. While there are many examples of products that have been successful without patent protection, in general, patents add value to an idea.
Registered trademarks can also increase your idea's value. Having a trademark gives you the right to bar others from using your registered trademark. Ruffles is an example of a registered trademark for a product owned by Frito-Lay Inc. Under trademark laws, no one can make a potato chip using the Ruffles name without the permission of Frito-Lay. Frito-Lay has the right to sue anyone who does so without its permission.
Trademark rights can make your idea even more valuable if you have developed a unique and marketable name, logo, slogan or symbol for your idea. For example, it would be hard to come up with a better name than "Tickle Me Elmo" for last year's megahit Tyco Toys doll. Clearly, the name added value to the idea.
However, your product's name, no matter how clever, may not be valuable to a prospective licensee if it uniquely distinguishes your company. Many companies, for example, use a product-naming strategy so their products sound like part of the same group. McDonald's puts "Mc" in the names of many of its products. If the company had bought the licensing rights to Tickle Me Elmo, it would probably have named it "Tickle Me McElmo."
A prototype of your idea also provides extra value in the eyes of prospective buyers because it allows you to demonstrate your idea and proves it can be reproduced into a tangible form. Obviously, a prototype that looks and works exactly the same way as the eventual marketed product is best because it leaves nothing to the buyer's imagination. It is also a positive reflection on you as a serious and professional individual who understands the sales process.
I have been sent an array of prototypes from people wanting me to buy their ideas. It is just human nature to conclude that a sloppy prototype, poorly painted and held together with duct tape, has a lazy and unrealistic seller at the other end.
If a quality prototype sends the message that you are serious about your idea, imagine the message you convey to a prospective buyer when you show and tell them exactly what is necessary to manufacture your idea. Now that's real added value!
Granted, gaining manufacturing know-how can be complex because you'll probably be researching areas you may be unfamiliar with, learning terms such as injection molding, fabrications and surface mounting. However, this information is very valuable to potential buyers because it reduces their research time and speeds up their purchasing decision.
Some of the information that must be determined includes how the product will be manufactured, the cost to set up the manufacturing process (tooling, molds, patterns and the like), and the cost of making each piece. If you go to the added expense of making molds or having a manufacturing firm ready to start production, this adds even more value for a buyer.
I entered into a licensing agreement with Tyco to sell a small version of my TopsyTail tool in conjunction with a doll it developed and sold as My Pretty TopsyTail. I was able to offer Tyco the use of the injection molding company that was making my TopsyTails. My relationship with that manufacturer saved Tyco the cost of going through a learning curve with a new injection molder, as well as the expense of negotiating for the best pricing. As a result, I received a higher royalty and could be assured the TopsyTails sold with the dolls would be of the highest quality.
Knowing the basic economic factors associated with your idea will not only add value to your idea but will also allow you to negotiate from a position of strength. Basic economic factors include raw material and labor expenses, manufacturing overhead, advertising and shipping costs, sales commissions, stocking fees, target markets and selling price. Determining these factors gives you a better understanding of the costs a potential buyer will be considering.
For example, if you determine it will cost $19 to make an item you suggest be sold for $20, you're looking at a very tough row to hoe. If, however, your $20 item can be made for $4, you have an opportunity to negotiate a higher royalty because you know there is a large profit margin. Moreover, calculating these expenses will give you greater knowledge and expertise. As a result, a potential buyer will have less opportunity to take advantage of you.
If The Idea Fits . . .
In addition to the things you can do to add value to your idea, another factor you must consider in evaluating the worth of your idea is the idea itself. Fair or not, certain types of ideas command higher prices.
Low-value ideas typically include improvements to existing products, clothing, and mechanical devices such as a can opener or a wiper blade. Medium-value ideas include developing new electronic devices and computer hardware and peripherals. High-value ideas include creating pharmaceuticals, software, videos and medical products.
The reason for this phenomenon is based on different industries' practices and the size of their profit margins. For example, once a piece of software is written, it can command a high price, even though the actual cost of manufacturing a disk is pennies. On the other hand, no matter how revolutionary a can opener is, there is a pricing threshhold of how much someone will pay for it. You need to understand the industry you are selling your idea to. If you don't, you may look foolish for asking for a price that is much higher than the industry standard.
How much money can you expect to see from selling your idea? Robert Chiaviello, a licensing and intellectual property attorney at Baker & Botts LLP in Dallas, offers the following guidelines: Assuming your idea is in a finished form, a patent has been issued or you've received a notice that your patent will be granted, and all the basic economic factors are known, you could expect the following royalty ranges:
*Low-value ideas: Less than 1 percent of revenues
*Medium-value ideas: 1.5 percent to 6 percent of revenues
*High-value ideas: 5 percent to 25 percent of revenues
One important final thought: No potential buyer is going to buy a product that doesn't "fit" with his or her company's image. As a seller, your objective is to make it as easy as possible for the buyer to say yes. Give a great deal of thought to your presentation, and make certain it meshes with the potential buyer.
Prove that your idea can be sold using the buyer's existing sales force, complements its existing product line, does not compete with any of its current products, looks like one of its products (either in its packaging, color or shape), and can work within its pricing structure.
Your personal presentation can also influence a sale. If you show up in a Hawaiian shirt and jeans, Proctor & Gamble may see a problem with you fitting into its corporate culture. However, that same outfit may score points for you at a high-tech firm in the Silicon Valley. Find the perfect fit . . . and you could be on your way to success.
Baker & Botts LLP, (214) 953-6677, fax: (214) 953-6503.
Tomima Edmark is the inventor of the TopsyTail, the Kissing Machine and several other products, as well as author of The American Dream Fact Pack ($49.95), available by calling (800) 558-6779. Write to her with any questions you may have regarding inventions and patents in care of "Bright Ideas," Entrepreneur, 2392 Morse Ave., Irvine, CA 92614.