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.

By Tamara Monosoff

Opinions expressed by Entrepreneur contributors are their own.

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:

  • Do you want to create a full-fledged business or generate a modest supplemental source of income?
  • Do you want to experience the entire process of taking your idea to market? Or are you happy to hand the creative process and control to someone else?
  • Do you want to earn a lot of money? Or will you be satisfied with a small, low-effort supplemental income?
  • Do you have a problem handing over your invention?
  • What part of the process is enjoyable for you?

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:

  • Do you have access to a telephone and a computer with internet?
  • Are you able to establish a basic work area to start a business? (This can be as simple as the family kitchen table or a spare bedroom to start with.)
  • Do you have the organizational skills and discipline to oversee the development of a business?
  • Do you have the interest and willingness to educate yourself and seek out help when needed?
  • Do you have the financial resources or current income to cover your basic living needs?
  • Can you tolerate the complexities and financial needs of a business startup?
  • Can you envision turning to other sources of support--emotional and financial--in the future when each becomes necessary?

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:

  • Can you tolerate the financial pressure of running a business?
  • Can you face failure if it should occur?
  • How well will you handle success? Can you grow your business intelligently?
  • How well will you handle the loneliness an entrepreneur feels before "turning the corner?"

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:

  • Set up corporate structure
  • Set up accounting/books
  • Business tax preparation
  • Get general and product liability insurance
  • UCC registration (barcode)

Licensing your invention:

  • Set up corporate structure (optional)
  • Keep records of expenses

Product Development
Going into business:

  • Develop:
    • Product design and engineering drawings
    • Presentation prototype
    • Working prototype
    • Injection mold or pattern
  • Manufacture product
  • Customs and shipping

Licensing your invention:

  • Develop:
    • Basic design
    • Descriptive drawing
    • Presentation prototype

Going into business:

  • Packaging design
  • Advertising
  • Public relations
  • Sales brochures
  • Website creation and maintenance
  • Product pricing
  • Modify packaging and product presentation

Licensing your invention:

  • Develop sell sheet

Going into business:

  • Sales planning
  • Sell to end customers
  • Sales calls to retailers (hundreds to thousands)
  • Recruit and support sales representatives

Licensing your invention:

  • Research and identify potential licensors
  • Write introduction letter
  • Contact potential licensors (10 to 50)

Going into business:

  • Warehousing
  • Inventory management
  • Shipping

Licensing your invention:

Going into business:

  • Get patent, copyright, trademark
  • Handle contracts
  • Resolve disputes

Licensing your invention:

  • Get patent, copyright, trademark (optional but advisable)

Financial Risk
Going into business:

  • High cost
  • About $20,000 to $250,000 over time
  • Risk of business failure

Licensing your invention:

  • Low cost
  • About $200 to $15,000 (depending on patenting and prototyping decisions)
  • No interested partners

Financial Gain
oing into business:

  • 40 percent to 100+ percent on sales

Licensing your invention:

  • 2 percent to 5 percent on sales

Time Horizon
Going into business:

  • Two to five years to reach profitable market

Licensing your invention:

  • One month to possibly no profitable market

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 ( ), your local SCORE (Service Corps of Retired Executives) chapter ( ), 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 ). Or check out Entrepreneur's "How to Build a Business Plan " guide.

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!

Tamara Monosoff

Your Million Dollar Dream: Regain Control & Be Your Own Boss Tamara Monosoff is the author of Your Million Dollar Dream: Regain Control & Be Your Own Boss and The Mom Inventors Handbook, Secrets of Millionaire Moms, and co-author of The One Page Business Plan for Women in Business. She is also the and CEO of Connect on Twitter: @mominventors and on Facebook:

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