This week, we’re talking about licensing deals! Personally, I think licensing deals are underutilized. I’d love to see more of them happening, as there is so much that can be leveraged in this form of deal-making.
What Can You License?
Anything that is created by you or your team (physical or intangible), is potentially licensible. Who will license it? Someone who will want access because they know they can leverage it in their own life, business, or community.
Licensing Deals & Inventions
First off, we have things that are patentable. This includes inventions and products; something you’ve created you can put a patent on. Chemical, mechanical, systemic, software; all of these types of inventions are things you can license. Bigger companies are especially interested in paying for tools that will enable them to manufacture, market, or otherwise use what you’ve built. Now, a large company would probably prefer to outright purchase what you’ve created — but don’t let them make you believe that that is your only option!
Even if you make a worldwide, exclusive, into perpetuity license that states only they can use it (and you won’t sell it to anyone else), you can still create a licensing deal rather than outright sale.
Of course you can also be thinking about ways in which to license your invention out to many companies, including competitors! By licensing the rights to what you’ve created, you can make a lot of money. It’s worth considering!
Also, think beyond physical items for this one. Training programs, keynotes addresses, workbooks, and so on; all of that can be licensed and sold to organizations who would love to use your content, curriculum, handouts, and frameworks. In the full episode I dive further into how you can make this desirable for your clients as well!
Structuring a Licensing Deal
A major early question that always comes is what the licensing fee or royalty is going to be. Every industry is a little different here; for instance, there could be a lump sum of money up front in order to get the rights to the license. In other cases, that isn’t an expectation.
In any industry, however, the idea of an ongoing royalty paid out to the owner is pretty standard. Monthly, quarterly, annually or other iterations are common. Total percentage varies greatly by industry; as a deal-maker, you’ll want to take a look at the norms within your industry as you consider this option.
The licensor will want to ensure that the base for setting the commission is top-line revenue, or a percentage of gross revenue. Why? Because once you get below that gross revenue line with a licensing deal, there is a lot of ability to manipulate and control what the number being used. Gross revenue is very clearly defined and diminishes game-playing.
As the licensor, you’ll also want to clarify some form of reporting to accompany your scheduled payments. This gives you a framework to ensure that the payments are appropriate to your deal. Keep in mind, however, that a report doesn’t mean that much if you can’t verify that it is accurate. The only way you can ensure accuracy is to retain some form of audit rights. You’ll want to know that you, or a third party provider, can double check to ensure that everything is above board.
Exclusive vs. Non-exclusive Deals
Depending on your industry and product, this may go either way. What should you do?
First of all, the licensor will want to lean towards non-exclusive deals. It makes sense that you stand to generate the most income by being able to create licensing deals with multiple parties for the same invention or intellectual property. However, that isn’t always an option.
For example, some organizations may need to know that they have exclusive rights to use a certain tool or framework. Now, this may extend to only certain industry competitors or geographic areas that you agree not to create deals within, or this could be complete exclusivity across all sectors. If you license it to one company in healthcare, for instance, you may agree that you will not license it to other healthcare groups, but that you can license it to a group outside of their domain, such as an automotive group.
Worldwide exclusivity that disallows you from licensing the group to anyone ought to be tied to minimum returns. This can at least ensure that you will make a return, even though you are limited to a single licensee. Now, if the minimum is not met, there are a few options.
For instance, the licensee may be allowed to maintain the license, but lose exclusivity. Or, the licensee may lose access to the product altogether. All of this needs to be included in the agreements!
Areas to Be Aware Of
Each state has variations on their rules about licensing. Something to be very aware of is the difference between a license and a franchise, which will differ in each state, and also has federal law attached.
For instance, McDonalds is a large franchise. You can’t start introducing your own food products into McDonalds, even if you are running your own location, because it is a franchise. There are expectations around how things have to look, how food is cooked, and what decisions you get to make. In a licensing deal, however, this level of restriction doesn’t usually apply. Does this mean that licensing is a free for all?
Well, as a licensor you do want and need standards! After all, your property and the elements of your brand or name that are being utilized are things you still want to reflect positively on yourself. If a licensee is using your product or performing in a way you no longer desire to be connected to, you may want to allow yourself an escape hatch.
Creating these standards can begin to cross line between licensing and franchising, which is why it’s so essential you understand the differences in your state. I highly recommend working with a professional for that part!
To learn more about finding licensees and getting started with licensing deals, listen in to the whole episode!
Corey Kupfer is an expert strategist, negotiator and dealmaker. He has more than 35 years of professional deal-making and negotiating experience. Corey is a successful entrepreneur, attorney, consultant, author and professional speaker who is passionate about deal-driven growth. He is also the creator and host of the DealQuest Podcast.
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