Licensing

Would you like to profit from your idea without having to start your own company, worry about manufacturing or handle the expenses of marketing your product? If that is the case you licensing may be the option you will prefer. Licensing means the owner of intellectual property (a patent, trademark, copyright or trade secret) gives someone else permission to produce the product related to that property. In return, the inventor is paid a royalty (typically 2 to 8 percent of sales, though mostly in the 2 to 4 percent range).

While licensing sounds like an ideal option, a license can be difficult to obtain, and often licensing agreements are only signed after an inventor has had some initial sales success. Other downsides of licensing are that once you license a product, you have no control over what the licensee does with it. The company may change the product, fail to promote it or even drop it after a few years. There’s also the risk that, while investigating your idea, the licensee may decide your patent is weak and design its own version of the product.

Money Matters

While licensing does save you the expense of launching and marketing your product, it still requires some capital. Typically you need, at minimum, a patent, a prototype and research demonstrating that there is a market for your product. If you can’t finance these steps yourself, you’ll need to seek an investor or partner. Partnering with a product designer, prototype engineer or small manufacturer can be a good way to share some of the financial burden while getting help with the design and manufacturing stages.

Virtually any type of product can be licensed. What varies is the stage at which a company will license the product. You may be able to strike an agreement quickly if you are already successfully producing and selling the product. You may be able to license a product with just a prototype if it meets a clear market need in a convincing way. In some cases, you may even be able to license an idea in the concept stage if the product has breakthrough potential in a major market. The key word is “may”. Licensing a product in the concept stage is highly unlikely. The further along your product is, the better your chances of licensing success. Try to take your product as far as you can before approaching potential licensees.

Before trying for a licensing agreement, you’ll need the following:

• Protection: You can’t give someone permission to produce something you don’t own. A strong, broad patent is essential. (For help in obtaining a patent, contact our Patent Associate, Ron Reardon)
• Prototype: A prototype is almost always necessary. Companies use licensing to avoid going through the costly development process themselves; they want you to handle the prototype stage for them. (For help with prototyping, contact our Prototype and Design Associate, T2 Design)
• Market Research: To convince the company your product will be successful, you may need to present a market research report that details competition and market size.
• Product Research: Your chances of licensing will increase as you add research on consumers’ response to your products, which could include focus groups or product evaluations by people who are prospective customers.

Targeting Companies

You need to start by making a list of the companies you would like to license to. Start by going to stores or other places where your product is sold. Not only look for what companies sell products that will compete with yours, but also companies with products that are sold in shelves near yours. For example if you have a new type of Tool Organizer, you might find two or three competitive products. But you will also see other products in the shelves, they could be tool drawers, paint brush holders, ladder accessories and other products to make it easier to store, locate and use tools. Once you get the names of the manufacturers at the stores go product directories in sites like the National Retail Hardware Association www.nrha.org. Look up the products you found on the shelf and you will see other companies with products in the same category. Include these companies on your targeting list. This becomes your list of potential licensees.

The best licensing prospects are not the biggest companies in the field; they feel their products are best and rarely want to replace a product of their own with one where they need to pay royalties. Instead look for mid size companies, of $5 million to $20 million in sales, who maybe hungry for new products and have the size of to fully launch your product. Larger local libraries will have the Million Dollar Directory which will list the size of companies you have on your list so you can find companies in the right sales level. Make a list of five to ten companies that sell the right type of products and are in the ideal mid-size annual sales range.

Making Contact

When approaching potential licensees, you need two types of contacts. The first are people who will convince a potential licensee that your product is ideal for the market. These include key users, key retailers and key people in the distribution channel. The second type of contact is someone who can “push” your product inside the company you’re approaching for a license agreement. This could be a company executive, a regional or national sales manager, a marketing person or the R&D director.

Of the two, your most important contact is the person inside the company. This person can help you fine-tune your proposal, tell you who you have to convince to license your product, and offer insights into what you need to do to get the deal done. To meet this kind of contact, you need to get out and attend trade shows, industry events and association meetings or utilize contacts you make with independent reps to help you gain inside contacts. Involve this person as early as possible so he or she can guide you in developing your product in a way the company you’re approaching would like. Also, making inside contacts doubles your chances of licensing a product. Without such a contact, you may never successfully pass through the company’s invention submission policy to make a presentation.

Locating Local Independent Sales Reps

Once you start getting trade magazines look for the new product section. As a rule, there will be a large number of new products. You should request literature from any product that would be carried in the same part of the store as yours. Often this literature will come with the name of a local sales rep for the product. Either keep these names on file, or call the rep and ask him to lunch. Tell the rep that you are considering entering the hardware market and that you would be glad to buy them lunch if you could pick their brain for some ideas on introducing your idea. You can also meet reps when you attend association meetings or trade shows. At a trade show, no matter where it is, ask at booths if the company sells through independent reps and then ask which rep covers your area. Try to find as many reps as you can as not all of them will talk to you. You may also want to use a rep that you have a good rapport to help you introduce your product. You will find it much easier to sell a product with a lead rep that knows the industry. Local reps who like your product can also help you get into five or six local stores where you can prove your product will sell.

Presentation Power

First-time inventors often assume businesspeople want nuts-and-bolts demonstrations focusing only on the facts. But they are just as bored by a dry presentation as you would be. Put some showmanship into your pitch to get them excited. You’ve worked hard to get in the door, so don’t be reluctant to spend a few thousand dollars on creating a stellar presentation.

• The Opening: Knock their socks off by showing end users who are excited about your product. Videotape testimonials, show people using the product, or use before-and-after pictures that show how well the product works.
• The Details: Once they’re interested, move smoothly but quickly through the details, including market research, your target customer, the distribution channel, projected profitability and why your product is a good fit with the company’s product line.
• The Proposal: Don’t make a formal offer. Instead, say something like: “I feel you are the best company to promote my idea, and I’m open to any type of partnership that works for you-from buying the product for private-label sale to signing a license.” If they don’t suggest a next step, offer to work with someone in the company to propose next steps for evaluating your product.

What to Do If They Show Interest

You should be prepared for the company if they are interested. You won’t get a licensed agreement right away as they will want to evaluate the idea further but you want to have the company sign a document showing you want to move ahead. I’ve included a simple letter of intent you can use as a starting point in your discussions.

Letter of Intent

Dear ______________ [ insert name of contact person at company that wants to explore the options of your invention ]:

This letter reflects our discussions regarding the terms and conditions of the proposed licensing agreement for certain technologies, more specifically described below. Please review this letter of intent, and if it accurately reflects our discussions, return a copy with your signature. We will then proceed to a written draft of the licensing agreement. Thanks for your cooperation.

Letter of Intent

This document is a Letter of Intent only. It is not intended to be, and shall not constitute in any way, a binding or legal agreement, or impose any legal obligation or duty on Inventor and / or Company.

The Invention

_____________ [insert your name] (“Inventor”) is the owner of the certain proprietary and intellectual property rights collectively known as “the Invention.” The Invention include: US Patent Pending #_____________ [insert patent number] US Patent Application #___________ [insert patent application number] , and certain Inventor proprietary information and trade secrets

The License

_________________ [insert name of company that wants to option your invention] (“Company”) is a manufacturer and distributor who desires to enter into a Licensing Agreement (the “Agreement”) for the purpose of [exclusively or nonexclusively] exploiting the Properties in the form of products (the “Licensed Products”) throughout _________ [ insert countries or regions for the license]. for ___________ [ insert the length of the potential license, for example, “five years”]. The license shall not include the right to assign or sublicense such rights to other parties without the express written consent of Inventor.

Operations

Company will bear all responsibility for manufacturing, advertising, marketing, promotion and support of the Licensed Products. Company will keep accurate records of accounting, distribution and costs and will make these records available for inspection on a reasonable basis.

Royalties

Company shall pay to Inventor a royalty rate to be determined of all “Net Sales” from the Licensed Products or any Licensed Products that use technology developed or derived from the Properties. “Net Sales” shall be all revenues (less credited returns) from the sale, distribution and transfer of any such products by Company.

Advance

As an advance against future royalties, Company shall pay to Inventor a sum to be determined upon execution of the Agreement.

License Agreement

The parties agree to use their best efforts to execute a written contract incorporating the terms of this Letter of Intent on or before ________ [insert date when option must be exercised].

If this accurately reflects your intention, please sign, date and return a copy of this Letter of Intent to the inventor.

_________________________________ Dated: ____________
Inventor Signature

_________________________________
Printed Name

________________________________________________________________________
Address

_________________________________
Company

________________________________________________________________________
Address

___________________________________ Dated: ______________
Signature

___________________________________
Printed Name

___________________________________
Title

Related Services:

1. Market Introduction Plans
2. Invention Evaluations
3. 20 Action Items to Launch Your Product

Related posts:

1. Selling to Hardware Stores – Part 2
2. Selling to Hardware Stores — Part 1
3. Hardware Reps and Selling into the Hardware Market
4. Selling through Hardware Store Representatives and Local Buying Programs
5. Selling on Commission