Today we are going to talk about how to look for and negotiate a licensing deal for your product idea.
Assuming you enjoy the thrill of negotiation and don’t want to spend thousands of dollars in legal fees, you can by-pass hiring an attorney to negotiate the deal for you, and go for it on your own.
That’s NOT to say that you shouldn’t be getting legal council along the way, but we’re going to explore the circumstances in which you are playing the central role in communicating and negotiating (as apposed to a legal professional).
Cutting a licensing deal is a lot like making any other type of business deal, with plenty of back and forth, research, concessions and counter offers before a deal is made.
So let’s assume you have a unique product idea and have submitted it for review to several large brands in the niche (be sure you had them sign an NDA). If things go well and you’ve done your homework and selected brands where your idea would be a natural fit, then sometimes you will get a general offer as your licensee prospect explores how to move forward: for example, worldwide exclusive rights for 3-5% royalty, for 3 years.
One thing to note is that this is just the beginning of the process, it’s not guaranteed that the deal will go through just because you get an initial offer so while you have cause to celebrate, don’t say yes to anything yet. These kinds of deals take time and lot’s of negotiating. You want to take things slow find out all you can about the required terms and conditions.
Exclusive rights. Does your potential licensee want exclusive or non-exclusive rights? Exclusive means that that they want to prohibit other companies from manufacturing and marketing your product idea. This is the common for licensing deals. The next thing you want to know is which territories or countries they want exclusive rights for, as well as what product categories or brands (if they have multiples of each) they want to use your idea in.
You’ll also want to ask your potential licensee to provide you with some previous sales records in the product category so that you can estimate your potential return on licensing. Normally this isn’t a problem and the company should have this data because they will want to do this research as well, to gauge the potential profitability of your idea.
You can use this information to put together a minimum sales guarantee which basically states that the licensee must sell X amount of the product per year in order to retain their exclusive rights to the idea.
Lastly, and even though there are many more details involved in negotiating a good licensing deal, another possibility you want to be aware of is what’s called an ‘advance against royalties’ and consists of some type of upfront payment as a gesture of goodwill, which should help you to cover a chunk of the final development and get you ready for mass-production. You don’t want to demand too big a lump-sum as that’s a good way to kill a deal and turn off your potential licensee, but try to get at least something to help you get into production or re-coup some of your patent costs.
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