Licensing vs. Manufacturing
Which do you think is the better route for you as an inventor – licensing or manufacturing?
The answer is complex because it begs more questions.
You need to decide which route to take early in the process. To do this, you have to take an honest look at your idea and yourself. Do you have the ability, resources and business savvy to manufacture and build a company around your product? Or are you better suited to license it?
Building a business around a product reaps you a larger share of the profits, as well as greater control over sales and marketing strategies. But you’ll also have the lion’s share of the risk, including inventory expenses, personnel hiring, quality control, returns, late shipments, contract breaches, knockoffs, patent-infringement issues, long hours and a large monetary investment. And it all could end in financial ruin if your product doesn’t sell. Or it could be an enormous success beyond your dreams.
Another thing to ponder: Are you willing to work your current job while getting the business off the ground or quit your job and put it all on the line? Likewise, if you have investors, you’ll have to decide what equity the investors get in the company for their funds. This now means you have shareholders to answer to since they want to ensure they will get a return on their investment. Investors expect to have a say in how the business is run.
Licensing means you’ll receive a smaller proportion of the profits, normally 2 percent to 8 percent, depending on the company’s policies and what you bring to the table. What do I mean, what you bring to the table? Things such as, do you have a finished product they can run with? Do you have an issued patent? Are they going to have to start from scratch and have a large upfront investment? A lot of factors go into what a company will offer you based on what you bring to the table. Yes, they get the lion’s share of the profit, but you have the least amount of risk and monetary investment.
Licensing requires you to find a company willing to license your product and fund it. Or you pay someone else to do the legwork for you. They will most likely charge a fee and want a percentage of the deal they get you.
Depending on your resourcefulness you’ll more than likely have to pay for a patent search, patent, prototype, presentation and legal fees. You’ll have to do this if go the manufacturing route, to in order to protect your product.
If you hire a licensing agent, whose duties include making calls to companies and negotiating contracts, you’ll have to pay her or him a percentage of the license and upfront fee in most cases. If you go to an Invention submission company to find a company to license your product be prepared for them to offer all sorts of services for a fee. Because in my opinion they make most of their money selling services versus getting products to market.
If you do get a licensing deal keep in mind companies often change the product’s design to fit their vision of what’s marketable. Your baby may not look like what you envisioned once it reaches the store shelf.
You will have to wait 30 days after each quarter to see if your royalty will be what you hoped. All the while you may be wondering if the company is pushing your product as hard as you would if you ran the company.
Despite all the caveats with licensing, I have personally favored this route. It works for me because I have numerous products in sell-sheet form, ranging from kitchen, toys, tools, pet, eyewear, lawn and garden and more. And I realized I do not want to start a business around every one of them. Each of these categories has its own set of rules and structure for getting to market. Just learning how to navigate each industry is a challenge on its own.
For someone else building a business around their idea is a dream come true and the best option for them. You have to go with what works best for you and your situation.
Manufacturing it yourself and licensing each has its rewards and pitfalls. Regardless the route you take, be as informed as possible, set realistic expectations and minimize your risks. You may be able to fool yourself about your product’s chances. But in the end, the consumer and market will be the final judge.