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How to license someone else’s product

Licensing allows you to manufacture and distribute (sell) another's product without having to invest in research and development.

Why license someone else's product?

Licensing gives you specific rights to make, sell, use or improve on a product that is copyrighted or protected as intellectual property. You might do this because you want to:

• Improve your own product or product line
• Access new markets
• Save on R&D costs
• Save on prototype and product testing
• Benefit from the experience of a licensor
• Stay above the competition

Licensing can help you access new and better products. It allows you to leverage ideas generated outside of your own development team.

What are your main costs and risks?

• Royalty: You pay a one-time or yearly fee, or an amount between 3% and 7% of sales.
• Restrictions: The licensing agreement may only apply to non-competitive activities.
• Dependencies: Licensing could eventually inhibit your ability to innovate.
• Associations: Your brand name may become associated with that of the licensor. This is a double-edged sword; it's good if the product does well, and bad if the product does poorly.

What is in a typical licence agreement?

Some companies have standard licensing agreements and others negotiate on a case-by-case basis. Most licensing agreements include:

Subject: In return for a royalty fee, the licensee gains the right to make use of a patent, copyright, trade-mark, industrial design or a trade secret.

Rights: What are the specific rights of the licensee?

Term: How long will the agreement last?

Licensor's obligation: What will the licensor do to transfer the rights? How much training, support, or other assistance will be provided to the licensee?

Licensee's obligation: What, if anything, does the licensee guarantee? Are there any secrets to keep?

Licensing fee: What must the licensee pay when signing the agreement?

Royalty: Will it be a lump sum, percentage of the proceeds, or amount per unit sold? Is there a minimum royalty?

Designated area and exclusivity: Where can the licensee manufacture and market the product? Can the licensor also make agreements with any other company?

Termination: Under what terms and conditions can either party end the agreement?

Guarantees: Does the licensor guarantee the product? Is the licensee responsible for warranties or public liabilities?

Finding a product to license

How do you find a licensor?

1- Prepare a profile of your company

Your profile should include:

• Name and title of contact person
• Reason for licensing (e.g. diversifying your product list, gaining efficiency)
• Facilities you have for manufacturing and/or marketing
• Your current products and services
• Your marketing areas
• Your sales volume
• Type of product or service you are looking to license
• Market you want to reach with the licensed product (note if this is different from your usual market)
• Exclusivity and protection requirements

2 - Contact licensors

You may be able to obtain names and coordinates of suitable licensors from:

• Licensing consultants
• Licensing exhibitions and associations
• Licensing or trade directories, publications and websites
• Canadian consulates and provincial trade offices and Chambers of Commerce in foreign countries
• Banks with international branches
• Research and development companies, and universities with research facilities

3 - Research possible licensors

Once you have narrowed the field of possible licensors, here are some steps you can take:

• Research the candidates; find out who they are and what they do
• Get in touch with those that interest you and give them your company profile
• Make sure that they are ready to license
• Find out if they have licensed before and who their licensees were
• Get permission to contact previous licensees and find out how the licensing relationship went

4 - Determine the feasibility of the opportunities

The licensor should provide you with enough information to determine the feasibility, including:

• Product brochure and bill of materials and specifications
• Estimate of the labour and time required to manufacture
• Length of time that they have marketed the product and the history of its growth
• Names of their other licensees
• Advantages over the competition and estimated total market
• Warranties they offer, as well as type and length of training they will provide
• Financial terms

Signing a disclosure agreement

The licensor may ask you to sign a Confidential Disclosure Agreement before providing any details. If the negotiations are taking some time, you may be asked for a letter of intent and a partial payment to keep the opportunity available. This gives you time to determine the feasibility of licensing the product and to figure out the terms you would like to negotiate in the agreement.