Has your company developed a product or process that’s innovative, patentable, and useful to other businesses? Think about licensing it—especially if you don't have the time or bandwidth to capitalize on it on your own.
In this article, we’ll explain what licensing is, some considerations to keep in mind, and the process for getting started.
What is licensing?
Licensing grants a person or a business the right to produce or sell a product someone else created. The person or business gaining the right, called the licensee, typically pays a royalty fee to the developer to gain access to the design.
Products aren’t the only thing that can be licensed. Processes, technologies, industrial designs, and other forms of intellectual property can be licensed, too. What matters is that the item, idea, or process is valuable to others and owned by a specific person or business willing to share it.
Why would a company license a product?
Intellectual property can have real, monetary value, but some owners don’t have the time, resources, or capacity to turn profit from it. Instead, they create licensing agreements that provide them with a steady stream of royalties that may far exceed what they could earn through their own sales and distribution channels.
Do others really want my intellectual property?
In many cases, yes. Lots of business-minded people with access to cash look for valuable ideas they can bring to market. These entrepreneurs may not have strong research and development (R&D) teams, time, or the innovative skills they need to dream up new solutions. Still, they know they can access strong, sound ideas by entering a licensing arrangement.
Is licensing the right move for my product or process?
It could be. There are some benefits to this option:
- Through licensing, you can focus on the parts of your business you do best without taking on production, distribution, or ancillary tasks.
- You can avoid many of the risks involved in bringing a new product to market.
- You can receive regular royalty payments for a considerable length of time, which you can use to cover your development costs or pursue new ideas.
Of course, licensing isn’t right for every product, idea, or business. Keep these points in mind before moving forward with this option:
- You’ll likely lose the rights to decisions surrounding your invention. These might include how it is produced, how it is marketed, and other factors that could determine its success.
- In most cases, you won’t receive royalties until after the licensee starts making sales. Unfortunately, this could mean long delays in recovering your development costs (or not recovering them at all).
- Some licensees will only agree to terms that provide them exclusivity. This would keep you from setting up licensing deals with other people or firms.
- At the end of your agreement, you have no guarantee of renewal. The licensee could move on to other ideas without any further commitments to your business.
How can my company license its product?
First, apply for a patent to prove ownership of your intellectual property. This guide will help you work through the process:
Next, prepare a presentation of what you plan to offer. Your presentation should include pictures or diagrams of your offering, a detailed description, its benefits, relevant market research, and pricing.
Lots of owners work with a licensing specialist to create their presentation and get it out to the right people, though you can certainly take on the work yourself. Here are a few that may be able to help you with this task:
One of the biggest challenges of licensing a product, process, or idea is finding others who may want to license it. Besides working with a licensing specialist, you might have success through these sources:
- Licensing exhibitions
- Ads with trade associations
- Ads in trade publications
- Connections with R&D companies
- Connections with universities with research facilities
Before disclosing information to possible licensees, be sure to have them sign a non-disclosure agreement (NDA). Your attorney can help you draft this document, or you can use an online legal template such as this one from Law Depot.
Next, take steps to confirm they can put your idea to work. To do this, you might ask prospective licensees to complete feasibility studies and submit them to you and your team.
Then, you'll work with an attorney to draft a licensing agreement with the terms the licensee must abide by. Often, this document will spell out when and how the licensee can use your intellectual property. It should also spell out liabilities, termination rights, and recourses.
The agreement will also state the royalty fee you'll collect, which is often 5% of gross sales or a portion of the proceeds earned when a good is sold to a retailer. This fee may increase or decrease depending on a few factors. You can claim the highest royalty fees by offering intellectual property that's already patented and market-ready and by having a proven record in developing successful products.
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