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Licensing Your Product
How to License Products

When you have a great idea for a product, you are faced with two options: to build a new company around that product from the ground up, or to sign a product licensing deal with an existing company. The first option basically requires you to create a business in order to commercialize your product, while licensing products allows you to utilize the resources of a pre-existing company to get your product into the market.

If you choose the latter option, and you successfully get your product licensed, the outside company will typically take over various tasks, like manufacturing, sales and distribution of your product, and you will receive an agreed-upon royalty on sales of the product for having the idea. Licensing products eliminates the hassle that you would have had to go through in order to get your business to take off, which leaves you with a lot of free time to focus on developing other product ideas. However, this also gives the outside company great leverage when negotiating on your royalties. To avoid signing a bad licensing agreement, there are several important guidelines that business owners should follow when they proceed to a licensing negotiation:


Be Realistic

Anyone who has tried either commercializing or licensing products can tell you that neither option is easy. Commercializing or creating a company to sell your product is extremely tasking and time consuming, and getting a company to license your idea is not a simple task either. In fact, reports suggest that less than 10% of inventors successfully manage to license their product ideas. If your dream is to see your product on the store shelves, then you need an appealing invention, as well as a charming personality that portrays diligence, tenacity, and professionalism.

Entrepreneurs need to understand that it is not easy to approach large companies when planning on selling or licensing products. Large corporations are concerned that they may have to pass on your product because they are already developing something similar, but because they have already looked at your product, you may have grounds to sue them later. In addition, many big companies invest heavily in their own research, and perceive that most of the ideas proposed by entrepreneurs are not commercially viable, cannot be manufactured and distributed profitably, and may not suit existing product lines.

Considering the barriers that entrepreneurs have to overcome in order to get their product ideas licensed, you need to go beyond getting intellectual property protection, and construct a refined prototype, perform market tests, and get useful feedback, to support your case.


Do your research

If you hope to have your product licensed, you must become exceptionally knowledgeable in the field to which your idea applies. You should have clear knowledge of your competition, your potential target market size, the estimated demand for your products, and how your product satisfies the market need, relative to other products in the market. Research is necessary to prove yourself and your product to the licensors.


Know the shortcomings

As an entrepreneur, you should be passionate about your idea, but it is equally important to be realistic. You should expect your prospective licensees to perform a thorough check of your credibility, which will be partly based on whether you can provide a rational analysis of possible risks that the licensee may have to deal with, like slow market adoption, or product failure.


Present professionally

You should present your prospective licensees with a well prepared document and presentation that includes market research data, patent status, extent of coverage, competitive analysis information, production cost estimates, feedback and testimonials, and any other material that demonstrates the high potential of your innovation in the market. It may be necessary to provide a letter from your patent attorney, indicating the relevant details of your patent application like the initial search and product specifications.


Investigate your targeted licensee

Before approaching any prospective company, you should perform thorough research before pitching to them. Depending on the requirements of your product, you should examine their manufacturing and distribution capacity. When you make your pitch, try to find an individual within the company who seems extra excited about your idea. Such an individual can champion your idea into the company from the inside, which is more effective than you trying to push it from the outside.


Use legal counsel

There is likely to be a lot of legal jargon during the negotiations, starting with that pertaining to intellectual property rights and non-disclosure agreements. You should seek legal advice when something in the licensing agreement seems vague or misleading. A lawyer can help you save money later, in addition to helping you seal a favorable licensing agreement. A royalty may not seem like a good enough reward, but you should consider that licensing eliminates many costs that you will not have to incur, like in manufacture, marketing, product launch, and distribution. Furthermore, a successful product licensing means that you will have an advance royalty and ongoing royalties. The advance royalty is a flat fee paid up front that serves as a guarantee that you, the licensor, will get some money even if the product does not sell. The ongoing royalties, on the other hand, are paid as a percentage of the wholesale price of every product sold. Your attorney can assist you to ensure that the licensing agreement candidly mentions the agreed royalty rates and other rights that you get, to avoid any surprises later.


Follow the right procedures

Different corporations usually have established protocol for submission of ideas. As such, you should follow the right course of action to avoid early elimination, even before your product idea is evaluated.

Be true to yourself

It is important to know exactly what you hope to achieve from a transaction. Large corporations can be brutal to entrepreneurs, so you should be prepared to walk away if you are dissatisfied with the deal. If you are turned down, take the meeting as an opportunity to learn. Ask the outside company what their concerns are, the possible solutions, and their preferences. You can use that information to learn and create a Yes in another licensing negotiation.


Approach multiple prospective licensees

This is a smart move to increase your odds for success. It can also give you some leverage on the negotiating table by displaying the competitiveness of the potential licensees. However, you will have to stop playing the competitors against each other once you choose to license with one of those companies, in order to start building good faith with them.


While the odds of successfully licensing products are very low, at 10%, it can be done with proper preparation and good legal counsel.