Do you have a vision for a product that you think will be a bestseller in the market? To bring this one simple idea to life, you have two choices. The first is to start your own business if you don't have one already, manufacture the product, find distributors, and handle the order fulfillment. The second is to license your idea to a company that accepts the responsibilities of bringing your idea to market.
Starting a company to develop and manufacture a new product that may or may not sell requires significant capital investment. Therefore, product licensing is a more lucrative way for entrepreneurs and inventors to make money from their ideas.
This article will discuss product licensing and the steps you can take to license your idea to a manufacturer that will bring it to market.
What Is Product Licensing?
Licensing is the process where a licensor gives the licensee the right to use any intellectual property for a fixed period of time to produce a product and earn a profit. The person or company granting the rights to intellectual property is the licensor, while the party receiving the rights is the licensee. The licensee typically pays an upfront fee and royalties to the inventor for the license. Most companies looking to license a new product idea are manufacturers that can produce, market, and distribute the finished product.
Pros and Cons of Licensing a Product
As with most circumstances, there are pros and cons when granting the rights to your product idea to another company. Here are a few things you should consider before deciding:
Pros of Licensing a Product
- It costs less than starting your own company to develop and manufacture the product.
- You don't need to market and sell the products.
- You don't need to worry about the coordination of fulfilling orders.
- You don't have to carry losses if the product isn't successful in the market.
Cons of Licensing a Product
- You won't have total control over the product design, manufacturing, or pricing.
- You might be better off selling the design to a manufacturer outright.
- You might have to approach several companies before you can close a deal.
How to License a Product
Here are the steps you should take to ensure you're on the right track to getting that licensing deal:
1. Do a Patent Search
To check if no one has claimed your idea yet, you need to do a patent search. A patent provides the exclusive rights to the process, design, or invention to the creator of a product for a specified period. Do your search through the U.S. Patent and Trademark Office (USPTO).
You can also use Google Patents to scan for possible similar claims. Take note that creating and marketing a product that's the same as a product already patented means infringing on that patent. Patent infringement means making, using, selling a product that contains every element of a patented claim within the time the rights are in place.
2. Protect Your Idea
If no patents like your design were filed, you may choose to file a provisionary patent to protect your idea. A provisional patent lets you file an incomplete application and pursue regular patent protection within one year. The drawback of a provisional patent is that you need to find a licensee within a year, or you'll have to file the patent and shoulder the cost yourself.
3. Find a Licensing Partner
There are several ways you can find a licensing partner. You can simply look up manufacturers of similar products and approach them. Make sure you're approaching companies with the capital, sales volume, and distribution capacities to manufacture and market your product. Check websites like thomasnet.com or Alibaba.com for a list of manufacturers that take on license partners.
Not all companies welcome pitches for new product ideas. Check the websites of companies you want to present your idea to and search for information on "open innovation." If they have instructions on how to contact them, this lets you know they entertain inventors. And you'll get instructions on what to do next.
Another way you can find a licensee is to attend trade shows or conventions to meet representatives of the companies directly. You can find trade show schedules at 10times.com. You can also visit your local library for a list of trade associations in your area.
4. Prepare to Pitch Your Idea
When you get a meeting with your potential licensee, make sure you are prepared to pitch your idea. If you can, find out in advance what they want to achieve at the end of the meeting. Do they only want to see your invention? Or are they prepared to negotiate a deal? Inquire about who you will meet and what their role is in the company. Knowledge of these facts can help you prepare a personalized pitch.
Present your idea with well-documented information that supports your invention. These include drawings and images detailing the specifications of your invention or a working prototype if you have it. Sell your design by understanding and presenting how your product can benefit users.
Convince the licensing company that your product is worth it by researching its market potential. For instance, do market research and gather statistics that show the need for the product and that customers will pay for it.
5. Prepare and Sign the Licensing Agreement
In your search for the right licensing partner, prepare yourself to pitch to several companies before closing a deal with one. However, you should be ready with a licensing agreement. The product licensing agreement contains your conditions regarding the use of your design. It also details royalties, payment structures, and other key issues on the manufacture and distribution of your product idea.
What Is a Licensing Agreement?
A licensing agreement is a legal contract between you and the manufacturer. The agreement grants the manufacturer the right to produce and sell goods or use a patented technology owned by you. Besides royalties and other payment structures, a product licensing agreement outlines:
- The exact description of the item being licensed (e.g., industrial design, market-ready product, brand name, patented technology)
- The licensor and licensee's respective rights and responsibilities
- Exclusive or nonexclusive rights of the licensee to the invention
- Designated territories regarding manufacturing and marketing
- Who pays for obtaining patents
- Whether future improvements to the licensed products are included under the contract
- Termination provisions of the contract
Licensing deals vary depending on what the licensor and licensee agree upon. So, make sure you consult an attorney for legal advice when creating a license agreement. A legal adviser can help you review and ensure agreement makes good business sense for you.
Manage Your Small Business Finances With Skynova
If you're an entrepreneur with a product idea, sometimes licensing is a faster and more lucrative way to bring your vision to market. This is because product development requires significant capital. Manufacturing also brings its own costs. And then, you'd need to market the finished product and make sure that distribution and product fulfillment go smoothly. All of which are immense demands for resources that you can't spare.
Save time from manually managing your business finances with Skynova's accounting for small businesses. Undertake bookkeeping with ease by tracking your income and expenses. Your receipts are recorded and kept in one place. And through automatically generated financial statements, you can compare your company's profitability from period-to-period. Knowing where your business stands helps you make better-informed decisions in managing your business.
Notice to the Reader
The content within this article is a general guide and may not apply to your specific situation. Always consult with an attorney when drawing up or signing contracts to ensure you're making the best decisions for your business.