Ask the Money Guy

Should You License Your Product?

Should You License Your Product?
Image credit: Pixabay
Magazine Contributor
3 min read

This story appears in the July 2015 issue of Entrepreneur. Subscribe »

Q: What are the pros and cons of licensing my product instead of manufacturing and selling it myself?

A: This is a dilemma that has been faced by inventors since, well, forever. Let’s break it down.

The Good

  • When you license your invention to a third-party manufacturer, you get your product to market with very little or no capital investment. You don’t have to shell out for manufacturing startup costs—raw materials, tooling and packaging—and you don’t need to build a marketing, sales and distribution network. 
  • The licensee’s market knowledge and experience will lower the risk on the product’s performance. They’ve already figured out what works and what doesn’t, which is why they want to make your product—they have a good idea that it’ll sell. If it’s a big licensee, that knowledge could take your product global; this would be a slow, expensive and risky proposition to pursue on your own. 
  • Upfront cash and/or royalty payments can be substantial and ongoing. (But keep in mind that there could be months of negotiating on this point, most of it not very pleasant.)
  • If you’re looking to break into a new market that’s outside your core business, granting a license to a company in that market will free up your time and cash so you can focus on the one you know best.

The Bad

  • You have to cede control over your product, from how and where it’s produced to its packaging, distribution, pricing, sales and marketing. Even scarier, you lose control over your intellectual property (especially if your licensee is based overseas). In addition, neither the schedule of product development and introduction nor the timing of future payments will be up to you.
  • Your licensee may choose to never put the product into production, while blocking you from doing so on your own (depending on the agreement).
  • The licensee may refuse to validate or let you audit their royalty statements for accuracy. Sure, you could take legal action, but that will get expensive fast, especially when dealing with a deep-pocketed and powerful manufacturer with the means to drag out the proceedings.
  • If you have multiple licensees in multiple markets, poor quality or service by one may harm the results of others. Or worse, your licensee may start producing a similar product for a new market and end up being your competitor.

LAST WORD: Although licensing can save a ton of headaches on the backend and shed sizable chunks of risk from your business model, the deals are complicated. If you go that route, you will need to budget for a top-notch, experienced licensing attorney to ensure you don’t fall into any traps. And you’ll want to tap that attorney before you contact potential licensees to introduce yourself or take a meeting if they come knocking on your door. Good luck!

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