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Licensing your product, idea, or service is one of the easiest and most profitable ways to make money without doing much work. In fact, it’s one of the quickest ways to make a million dollars. In this article, I’ll talk more about licensing and what you need to know about it.
What is licensing, then? Licensing is when a licensor and a licensee make a legal deal. The owner of a product, idea, or service is the licensor. The company that will make, market, and sells a product, service, or idea is called the licensee. The person who owns the rights to the product or idea will get a royalty in return.
Every day, we walk to our mailboxes with slouched shoulders and pick up piles of paper: bills we wish we didn’t have to pay, store flyers selling things we don’t necessarily need, and offers for yet another credit card with better benefits than the five we already have in our wallets.
not as much fun as it used to be to get mail.
But imagine that your Tuesday afternoon stroll to the mailbox didn’t just give you a reason to walk a few more steps to recycle those annoying piles of paper. This time, the envelope containing your first royalty check has finally arrived. How did you get that money? What did you have to do? Nothing at all. It’s a way to make money without doing anything.
That’s why a licensing deal is so great.
You get paid every time someone buys your product. But before you sign on the dotted line, there are some important things you should know about licensing agreements. These include the pros and cons, how to find the right company, and a few important steps you’ll want to take as you think about your options.
Which is better for you: starting a business or getting a license?
If you’re thinking about a licensing deal, you’ve probably been through a lot. You’ve probably gone through the new product development process and decided that your product or service is ready to be sold.
At this point, the most important choice you need to make is whether to start your own business or give a license to another company to sell your product. A big part of your choice will depend on how much control you want to keep and whether or not you have the money and skills to start your own business.
No matter what, the point of all products and services is to make money. One important thing to think about is whether you can make more money by starting your own business and making the product or service yourself, or if you will make more money by licensing the product or service to another company (Abedi, 2018).
Why getting a license is a great choice
When you think about the time and money it takes to start a new business and the fact that licensing puts your product or service in front of an already-established customer base and a much larger audience, it’s easy to see why licensing is often a better choice (Abedi, 2018).
Let’s say, for example, that you’ve made a snack cup for kids that keeps snacks from spilling and has different spaces for different kinds of snacks.
Your design is simple enough that kids can choose which snack they want but just complicated enough to keep goldfish and cheerios from spilling all over the floor. You could start your own business and make a detailed marketing plan to reach your target audience and sell your product.
But if you sell your idea to an established, well-known company that already has a presence in your target market, you are likely to do much better in the long run, and you avoid the risk and responsibility of starting your own business (“Getting Started as an Entrepreneur,” 2019). If your product does well, licensing can make you a lot of money without you having to do much. The company also benefits from the new product line because it helps them make a lot of money, which is something they need to do to stay competitive in the market.
Still, there are pros and cons to both options, so if you decide to license your product or idea, it’s important to carefully weigh your options and take the steps you need to before signing a contract with a licensee.
The Point of Getting a License
There are two main goals of licensing. On the one hand, companies that have been around for a long time have access to capital, expertise, and experience in a market that is already well-known. (“Product Licensing,” no date). As a new business, you will need to either get other people to invest in your product or use your own money to get it made. This can take a lot of time and money, and it can also be dangerous.
Second, a larger, more successful company will be able to make more of your product and sell it to a much wider audience than a smaller, independent company (Weston, 2019).
Basically, a licensing deal seems like the best choice because you get a cut of the money and don’t have to do any of the work. As the money starts to come in, you can sit back, relax, and check your mailbox for that elusive return on your investment.
Patent Protection for Ideas and Inventions
With licensing, you are essentially selling your intellectual property and your ideas. So, before you enter into an agreement, you’ll first want to check to ensure that your product is eligible to be protected by a patent – and register with the United States Patent & Trademark Office. There are various types of patents, most common utility and design – the former specific to the functional aspect of your product, and the latter to the aesthetic appearance or design. A patent protects you by ensuring that others cannot make, use, or sell your invention without penalty (Purvis, n.d.).
An additional purpose of a licensing agreement is to ensure that the rights of both you, the licensor, as well as the licensee are protected by law. By entering into a contracted relationship, your patented technology or product cannot be violated by the licensee (the company to which you are entering an agreement) without penalty. The licensee is also protected and permitted to use your patented technology, idea, or product for as long as your agreement allows, provided you are given the established royalty fee at the agreed-upon time (“All Kinds of License Agreement Templates,” n.d.).
Advantages and Disadvantages of Licensing
One of the biggest advantages for a licensor is that it allows you, the creative genius behind your invention, to continue to do what you love: come up with new ideas for innovative products or services. You won’t have to worry about starting or running your own business, or the manufacturing and marketing necessary to become profitable. And, having already forged relationships with well-established companies can open the door for further opportunities down the line.
| Advantages to Licensing | Disadvantages to Licensing |
| You will not need to incur the costs of producing, promoting, packaging, or selling your product. | You will likely lose control over your product, including promotion, packaging, and selling. |
| The licensee already has knowledge and know-how as it pertains to breaking into an already established market, so there is no risk to you. | You will only receive a portion of the profits from the sale of your product, as outlined in your agreement. |
| Depending on the terms of your agreement, your royalty payments can last a very long time. | If your product does not sell well, you will not receive royalty payments; or, it may take a while until you receive a payment, depending on your agreement |
Much of the decision pertaining to whether or not you choose to license is dependent upon your goals. If you prefer to have complete control over your invention, including branding, promotion, and packaging or design, you may not want to go the licensing route because you will likely lose control over these aspects.
If, however, you’d prefer not to risk financial loss if your product does not do well, and you are more interested in creating other new products or technologies, licensing can certainly benefit you more so than starting your own company.
Types of Licensing Agreements
The most common type of agreement for independent entrepreneurs will fall under the patent license category (“All Kinds of License Agreement Templates,” n.d.). In the simplest of terms, you are allowing some entity to use your intellectual property – your idea or invention – which you have taken steps to protect via a patent. You are essentially granting permission to reproduce what you have created, whether that is a tangible product or design, or intangible idea.
Licensing agreements can also come in the form of trademark agreements, copyright material, technology licenses, and trade secret agreements.
Examples of Licensing Agreements
| Type of License Agreement | Definition | Example |
| Patent License | The licensee gains the right to use your patented intellectual property (IP) for a fee (royalty). | Tangible products or ideas created by a company or independent entrepreneur |
| Trademark License | The licensee gains rights to utilize your trademark in connection with specific goods and services. | Design, artwork, and fictional characters for use on other products |
| Copyright Material License | The licensee gains rights to use material developed or created by a licensor. | Educational resources and materials; branding or logos |
| Trade Secrets | The Licensee is required to disclose the use of trade secret information that is deemed secret and has commercial value over other businesses or organizations. | Formulas, patterns, information or processes, etc., as well as designs, prototypes, programs, and/or codes |
| Technology or Software License | The licensee is granted permission to use the licensor’s technology or software programs, and will often also receive related services (training, maintenance, and support). | Computer programs and the code therein (the code, as stipulated by the licensor, may or may not be altered, as specified by the owner of the technology) |
Many times, licensing categories overlap and are not mutually exclusive. Most importantly, the agreement should include the description of the product or service being licensed, the license grant, which provides a license for use of the intellectual property or asset, the obligations of both parties, and most importantly, the agreement of financial arrangements, both minimum payments, and royalties on sales as well as the minimum sales target and timeline (“All Kinds of License Agreement Templates,” n.d.).
Licensing with the Right Company
All companies are not created equal in this equation. It’s important to do your research if you do plan to license. You want to ensure that the company you market your invention to is one that will best be able to produce, market, and sell your product or service (“Getting Started as an Entrepreneur,” 2019). Find out about the company’s sales, product lines, and market, and determine how you will fit into their structure.
The company should also have products in the same category. If we go back to the example from earlier about a snack cup for kids, you may consider seeking a licensing agreement with an established baby or toy company that is already successful in the market. You don’t want to compete with products the company is already producing, but rather add to the value of the existing product line (“Getting Started as an Entrepreneur,” 2019). In this way, you are much more likely to land a lucrative deal.
Licensing Versus Franchising
Where new services are considered, it’s a little bit different that the process of obtaining a licensing deal for a product or idea. A franchise, unlike a license agreement, refers to granting rights of use for service companies or business models rather than products. While similar in idea, the two are not quite the same.
The main difference lies in the idea that licensing refers to granting another entity permission to utilize your invention, idea, or technology in order to create a product that will benefit (via revenue) both parties in the agreement. It is generally a one-time transfer of intellectual property. A franchise, on the other hand, involves ongoing assistance and a mutual relationship between two parties (Sharma, n.d.).
As the owner of the business model and branding for your service, you would be deemed the “franchisor.” A “franchisee” is the person or persons who will then sell your service to an additional customer base in a separate location. The franchisee is granted permission to use your business model, as well as your name and branding, in order to profit from selling your service as an independent branch of a parent company (Sharma, n.d.). As the franchisor, you exact a fee from the franchisee for use of your service idea.
The simplest example of a franchise agreement can be seen in the fast food industry. If you walk into any Mcdonald’s or Dunkin Donuts, you will see a very similar if not exact business model, branding, and product line. These details are dictated by the franchisor. While the franchisee runs the day-to-day business operations, the franchisor has considerable control over the process. In this way, the franchisor retains more control over the service than a licensor would over the manufacture of a product (Sharma, n.d.).
Advantages and Disadvantages of Franchising
The benefits of franchising are similar to that of licensing. The franchisor does not incur the cost of developing branch locations – that is the responsibility of the franchisee, though there is generally required some level of training and support. The risk of expansion is lowered exponentially, especially as it pertains to entering global markets Sharma, n.d.).
The reverse disadvantage, however, can occur in the management of quality control. It is much more difficult for the franchisor to oversee the quality of the service. However, the ideal situation is that the brand name itself represents the quality customers can expect, no matter the location (Sharma, n.d.).
Licensing and franchising are both simple and simultaneously complex. A lot goes into the end result, and the decisions about how to proceed should be made with caution. It is generally recommended that you seek the assistance of an attorney who is well-versed in areas of licensing agreements to ensure that your agreement is properly negotiated.
Final Thoughts
Perhaps long gone are the days when we’d run off to the mailbox after school, frantically searching for a single envelope with our names on it, the one that just might be hiding a crisp, candy-store-worthy five-dollar bill from Uncle Ted in Florida.
But this envelope is even better.
Once you’ve landed a licensing deal, that shoulder slouching stroll to the mailbox after a long day will once again be reminiscent of your childhood – only this time it is a white business envelope holding a much more lucrative sum than those five golden dollars from years before. All you need to do is check store shelves for your invention, watch your sales, and wait for that golden ticket to arrive – your first royalty check.
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