How to License Your Product

When you license your product to a manufacturer, you will be free to pursue your other interests while receiving royalties on sales. This way, if you invented a product and you do not want to manufacture and sell your invention, you have an alternative. However, getting a license and making sure the contract is fair can be difficult.

Getting a Patent
Most companies will not consider talking to you unless you have taken out a patent on your invention or product. A patent will also give you some protection against another person or company stealing your design. However, most companies will consider your product if you have a patent pending.

Hiring an attorney at this stage of the process can be helpful. Your attorney will be able to assist you in finalizing what information to share during early stages of negotiation and determining whether you should sign a confidentiality agreement with any given company if asked.

Finding Potential Manufacturers
Next, you need to search out manufacturing companies that might be interested in your invention. The object is to find manufacturers that are making products similar to your invention. One way of looking for potential companies is to use business reference books at your local library that list companies by North American Industry Classification System codes (NAICS codes). You may also find businesses that offer pertinent information online free or choose to purchase a more precise listing. After you put together your list of potential manufacturers, prioritize the companies according to which company you think would be your best bet.

Then keep researching your short list. Not only to do you have to know the manufacturing capabilities of the company and its financial health, you have to know the company's product line and how your product will fit in with the line. Know if the company sells direct to end users, uses distributors or uses both. Does the company hire its own sales staff or do it use representative companies?

If you get an appointment with a manufacturer, you need to be ready. Know your product backwards and forwards. Take pride in your invention's strengths, and be honest about your product's weaknesses. Have projected manufacturing costs available, and have a suggested distributor and/or retail-suggested pricing so that you can give estimates of profitability.

Also have possible downside projections available for your presentation. Instead of having just one set of numbers regarding breakeven and profitability forecasts, have several sets. The company is going to want to know what its downside is. Consider what will happen if your product does not take off as you anticipate or if there is a market downturn.

Types of Licenses
Once you make it through the patent and presentation stages, you have several options available to you when licensing your invention. These types of licenses include:

  • Exclusive licenses: Exclusive licenses grant one company the rights to your product. However, exclusive licenses are not actually as limiting as they sound. You can grant one company exclusive rights to a territory, such as a state, and allow another company exclusive rights to a different state. You can also target markets. For example, if your widget works in the marine industry and also works in the beverage industry, you can grant one license to a company that deals with the marine industry and another license to a company that works in the beverage industry.
  • Know-how license: A know-how license entitles the licensee to specific information or knowledge that you have.
  • Non-exclusive licenses: Non-exclusive licenses allow you to license your widget to any number of companies.
  • Trade secret license: A trade secret license is designed to protect a trade secret and involves an agreement on how the licensee will protect the secret from competitors.

Determining Your Parameters
You should have what you want from your agreement and your drop-dead points determined before you start to negotiate with potential licensees. You will have to decide:

  • The length of time that you are willing to grant the license
  • How much money you are willing to commit to helping your licensee succeed and where you would agree to spend that money
  • How much money that you must have in royalties, if your licensee is willing to give you a guarantee
  • If you are willing to lower your royalties if your licensee will pick up some of your costs, and, if so, by how much

The best approach to negotiating is to gear the negotiations toward a win-win situation. You may not get everything that you want during negotiations, but neither will your licensee. Hopefully, you will both get enough so that you are on the road to a positive relationship.

What to Expect From Royalty Payments
Percentages can range from as low as two percent to up to ten percent or more. One way to determine the percentage that you might make is to look at the industry. For example, one industry may offer lower returns to you because the industry sells directly to consumers, which tends to be more risky financially than selling to companies.

Another method of determining your returns is to look at the sales potential of your product. This would involve a thorough analysis of projected sales, profits and costs. You may also work out an agreement that uses components of both industry standards and sales potential.

Reality Check
The bottom line on licensing a product is that very few succeed. Generally speaking, less than 10 percent of those who try to get licenses actually get to the point where they can close an agreement.

If you are planning on pursing licensing, keep a lawyer or a consultant on board to help you work through the process, even after you get a patent. This does not mean that you should skimp on educating yourself about licensing your product. The more educated you are, the more successful you are likely to be.

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The licensing process is time-consuming and can be expensive because you will need the services of a lawyer. Therefore, understanding what you need to do before you pursue a license can help prepare you for the road ahead.

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