Let's Make a Deal Licensing your idea to a bigger company can mean fewer hassles--and a lot more money in your pocket.

Would you like to profit from your idea without having to startyour own company, worry about manufacturing or handle the expensesof marketing your product? Consider licensing.

Licensing means the owner of intellectual property (a patent,trademark, copyright or trade secret) gives someone else permissionto produce the product related to that property. In return, theinventor is paid a royalty (typically 2 to 8 percent of sales). Onecompany I worked with signed a licensing agreement with theinventor of a vibrating dental scaler. Over 10 years, theinventor's 8 percent royalty amounted to more than $30 million.Not bad for an investment of $15,000 for a patent and a roughprototype.

Licensing can be ideal if you don't have the desire orexpertise to market your product. It lets you take advantage of themarketing power of a large firm and enables you to concentrate oncreating more products instead of working on marketing oroperations.

On the downside, once you license a product, you have no controlover what the licensee does with it. The company may change theproduct, fail to promote it or even drop it after a few years.There's also the risk that, while investigating your idea, thelicensee may decide your patent is weak and design its own versionof the product.

Money Matters
While licensing does save you the expense of launching andmarketing your product, it still requires some capital. Typicallyyou need, at minimum, a patent, a prototype and research that showsthere is a market for your product. If you can't finance thesesteps yourself, you'll need to seek an investor or partner.Partnering with a product designer, prototype engineer or smallmanufacturer can be a good way to share some of the financialburden while getting help with the design and manufacturingstages.

Virtually any type of product can be licensed. What varies isthe stage at which a company will license the product. You may beable to strike an agreement quickly if you are already successfullyproducing and selling the product. You may be able to license aproduct with just a prototype if it meets a clear market need in aconvincing way. In some cases, you may even be able to license anidea in the concept stage if the product has breakthrough potentialin a major market. The key word is "may." Licensing aproduct in the concept stage is highly unlikely. The further alongyour product is, the better your chances of licensing success. Tryto take your product as far as you can before approaching potentiallicensees.

What You Need

Before trying for a licensing agreement, you'll need thefollowing:

• Protection: You can'tgive someone permission to produce something you don't own. Astrong, broad patent is essential.

• Prototype: A prototype isalmost always necessary. Companies use licensing to avoid goingthrough the costly development process themselves; they want you tohandle the prototype stage for them.

• Research: To convince thecompany your product will be successful, you need to present amarket research report including:

1. Customerinformation

• Number of customers
  
• Key buying influences
  
• How they buy
  
• Where they buy

2. Competitive audit

• Market share
  
• Major strengths
  
• Major weaknesses
  
• Product opportunities

3. Industry opportunities andthreats

4. Key industry trends

MakingContact
When approaching potential licensees, you need two types ofcontacts. The first are people who will convince a potentiallicensee that your product is ideal for the market. These includekey users, key retailers and key people in the distributionchannel. The second type of contact is someone who can"push" your product inside the company you'reapproaching for a license agreement. This could be a companyexecutive, a regional or national sales manager, a marketing personor the R&D director.

Of the two, your most important contact is the person inside thecompany. This person can help you fine-tune your proposal, tell youwho you have to convince, and offer insights into what you need todo to get the deal done. To meet this kind of contact, you need toget out and attend trade shows, industry events and associationmeetings. Involve this person as early as possible so he or she canguide you in developing your product in a way the companyyou're approaching would like. Also, making inside contactsdoubles your chances of licensing a product. Without such acontact, you may never successfully pass through the company'sinvention submission policy to make a presentation.

PresentationPower
First-time inventors often assume businesspeople wantnuts-and-bolts demonstrations focusing only on the facts. But theyare just as bored by a dry presentation as you would be. Put someshowmanship into your pitch to get them excited. You've workedhard to get in the door, so don't be reluctant to spend a fewthousand dollars on creating a stellar presentation.

• The Opening: Knock theirsocks off by showing end users who are excited about your product.Videotape testimonials, show people using the product, or usebefore-and-after pictures that show how well the productworks.

• The Details: Oncethey're interested, move smoothly but quickly through thedetails, including market research, your target customer, thedistribution channel, projected profitability and why your productis a good fit with the company's product line.

• The Proposal: Don'tmake a formal offer. Instead, say something like: "I feel youare the best company to promote my idea, and I'm open to anytype of partnership that works for you-from buying the product forprivate-label sale to signing a license." If they don'tsuggest a next step, offer to work with someone in the company topropose next steps for evaluating your product.

Adapted from Think Big: Nine Ways to Make Millions FromYour Ideas (Entrepreneur Press) by Don Debelak