Licensing your Product or Process
April 24, 2017
Entrepreneurs who are developing a product (product or process) for commercialization basically have two choices to get their product to the marketplace; manufacture it themselves or license the right to make and distribute to someone else. This process is called licensing out. A license, through a licensing agreement, is a formal granting of the rights to make and sell to another party, who is called a licensing partner. The entrepreneur, or licensor, is usually paid in up-front fees and ongoing royalty payments.
Licensing offers a way of getting products to existing or new markets more quickly and with less expense. Many entrepreneurs lack the large amount of capital needed to invest in manufacturing, selling and distributing. Licensing offers a way to reduce capital investment by selling the rights to those who are in the business of manufacturing, selling and distributing. In addition, an entrepreneur who develops a product may not have the expertise to manufacture and take it to market. Licensing provides a way to develop the product and has experts in these areas do the rest. The chances of success and gaining wealth from the development of a product are greater if you allow experts with manufacturing plants, sales forces, and well developed distribution systems handle taking the product to market.
Licensing can also be used to expand into markets where one has little knowledge or experience. For example, I know of a firm developing a medical device. They will manufacture, sell and distribute the device themselves here in the U.S. However to expand to other countries, the firm will license the rights to licensing partners to make and distribute the product in a particular country, and gain additional revenue without having to invest a large amount of money. In the future, when the licensing agreement runs out, the firm may decide to develop the capabilities themselves if they then have the capital and expertise to do so.
Experts say licensing is not an easy task, and an entrepreneur needs to develop a licensing strategy or plan of action. Elements of a licensing strategy include research on the industry and market for the product, research on a group of possible licensing partners, and getting resource partners who can help you through the process.
Visiting with an attorney experienced in licensing is your first step. They can help develop a licensing strategy, negotiate a licensing agreement, and help research and select a licensing partner. In addition, they can help secure your intellectual property through patents. You can secure other resource experts to help with the market and industry analysis. This is where the SBDC can assist. We have the resources to help entrepreneurs with market and industry analysis for any purpose.
So if you have developed a product, and have a working prototype, you should explore licensing as a way of getting the product to market in a less expensive way. If you find the right licensing partner, you may be able to reap the rewards through royalties. The process is not easy, but you may find it easier than trying to manufacture and distribute it yourself.
“Business Tips” was written by Mr. Dave Erickson, Director and Certified Business Advisor, of Angelo State University’s Small Business Development Center. For more information on the topic of this article or the services of the ASU • SBDC, contact him at David.Erickson@angelo.edu.