After manufacturing and selling our Safety Accessories for Ladders for a couple years, we received a call from our largest distributor, a company located in Seattle. They wondered if we were interested in licensing our product line to them. They were one of the top national safety supply companies in America and were well respected.

 

Keep in mind, most companies will not do a licensing deal without a patent, or track record of impressive sales. So, licensing is not always an option. When it is, it’s worth considering. It was for us. Our business’s growth was on the verge of skyrocketing. With insufficient resources in our pockets to support such growth, we seriously considered our options.

 

Be realistic about cash flow.

Our product liability insurance alone cost us over $25,000.00 per year. We had recently paid out a few thousand dollars for new tooling in China and tens of thousands of dollars more in national advertising and trade shows. We could see the road ahead would be expensive, requiring funds we did not have.

 

Licensing would remove all these costs and responsibilities, placing them in the deeper pockets of the licensor. Even though, as licensee, we wouldn’t make as much money as we would as manufacturer, we realized it would be in our product line’s best interest to partner with a large and respected company. And, there’s something to be said about not doing anything but getting a check in the mail every month.

With licensing, you keep your patent.

By making the decision to go with licensing, we retained our intellectual properties (patents) and licensed only the rights to manufacture and market our product line, exclusively, to this large company. Should said company go out of business or file for bankruptcy, we would still own our patents, allowing us to negotiate licensing with someone else.

 

A hard lesson.

Remember my cupholder invention? (You can read about it on my website.) Years before licensing the ladder company, I sold the cupholder business (including my patents) to another company in a deal that promised me future royalties “in perpetuity,” which means forever. Ten years later, another company purchased the company that owned my cupholder business; all good—these things happen. My royalty deal remained intact. Until, however, that company filed for bankruptcy one year later. Even though I had signed an agreement that gave me royalties forever, I learned that bankruptcy law supersedes contractual law. So, my future royalties evaporated. Dead and gone.

 

Now I recognize that had I sold the business for millions up front—with no royalty agreement—I would not have been adversely affected financially when that company went bankrupt. To be clear: The deal I made did include decent money up front and long-term future royalties, which is where the real value of the deal seemed to be from my perspective then. Licensing, however, would have been the wiser avenue but at the time, I never considered it. Shame on me.

 

Negotiations matter.

Licensing royalties are determined during the negation process. It’s common for a royalty to be somewhere between five and fifteen percent of the sale amount, although a specific dollar amount can also be negotiated. There are all kinds of options to consider as you structure the agreement; for example, our licensing deal was a dollar amount for retail sales and a percentage for wholesale. Payment is typically made monthly. The bottom line is this: When you license out your product, you can structure a deal that works for both parties.

 

For simplicity’s sake, think of a licensing deal as the best choice when your resources are limited and heavy growth is anticipated, but you don’t need to sell outright. Keep in mind, however, the dates of your patents; a licensing deal lasts only as long as your patents are effective. The terms of your licensing deal should include this consideration.