Forums: Discussions for entrepreneurs and small business.

Ok folks, I could really use some advice.  

I have developed a product and have been building them out of my basement.  It has strictly been a word of mouth type sales.  I have not attempted to advertise and market it because I don`t have the bandwidth to build them. It is a small niche market and they sell for $100-$200 (depending on configuration).  I have been contacted by someone who is looking to build and market the product and is offering me a licensing fee to use my design.  I do not have a patent and there is nothing stopping this individual from just cutting me out all together.   He has asked me for what I have in mind for a licensing fee and that is where I`m struggling.   I want it to be fair and that is why I`m asking for some guidance.  I have offered to be involved in the engineering to make product improvements, etc.   He has also offered to sell them to me at a discount and he would drop ship to my customers.  He has not figured out his cost to build yet, and therefore has not set selling price.  I could be way off base here, but I was thinking the licensing fee should be a percentage of the sale price (or sale price less cost, depending on how you want to look at it).  I have no idea what would be a fair deal for both of us.   Any guidance would be greatly appreciated as this is my first time doing such a deal.

Thanks....

Just my thoughts.  I would get your product patented.  All this other person you mentioned has to do is have a third party buy one of your items.  This other person can then market the item.


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The older we get, the more excuses we make for not chasing after our dreams. But truth is, goals are attainable at any age.

I have already went through the thought process about patents and have decided it is too costly for such a niche market product.  Volumes would not cover the cost, nor would I be able to afford to defend it anyway.   The hope is that if we get established,  there wouldn`t be a big enough market left to make it worthwhile for someone else to get involved.   I realize the exposure and realize that the other party doesn`t have to pay me anything.  But I think he sees the value of keeping me in the loop for product enhancements and that is why he wants to offer me a licensing fee.   I just don`t know where to start and what would be fair to both of us.
 Any guidance would be appreciated.

Licensing fee's are generally what you can negotiate.  Most average around 7% of the net selling price.  The net selling price would the be the wholesale selling price minus the shipping and handling costs and any discounts and/or returns given. 

 

In regards to your IP, I would recommend doing a provisional which will at least give you something to hang your hat on because truly, it wouldnt stop anyone from doing what you are doing if you dont have some sort of protection.

 

Make sure and have the other individual sign a NDA and make sure and have a competent business attorney draft your contract.

 

I would also put in annual minimums so that you arent stuck if he or she decides to sit on the product.  Make them reasonable and achievable but profitable to you as well.

 

Just my two cents.

 

Michael

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Michael Bloom is President of Sinotech in Portland, Oregon, which has been engineering and supplying custom mechanical and electromechanical parts to clients across the globe for over 20 years. Michael is certified by the U.S. Small Business Administration as a Global Trade Counselor and by NASBITE International as a Certified Global Business Professional (CGBP). Michael received his B.S. in Electrical Engineering from the City College of New York, an M.S. in Counseling from Long Island University and has done doctoral work in Educational Administration at Hofstra University. He is the former President and current Board member of the Northwest China Council and an advisor to Portland’s Small Business Development Center. Michael is also a speaker for the Jewish Federation of Portland’s Hope for Peace project and a founder and officer of the Oregon-Israel Business Alliance. He has published more than 50 magazine articles and conference papers and has been quoted often in various media outlets on issues concerning China.

Some delayed comments:

1:  If nothing else, bundling up the documentation for the product and sending it in to the USPTO with a $110 provisional patent fee is a lot better than nothing.

2:  Sometimes design patents are appropriate.  These are much cheaper than regular patents, and the USPTO grants over 80% of all design patents with little discussion.

3:  Look at licensing fees from the standpoint of the buyer.  The buyer is going to be risk adverse and wanting to maximize his or her profit, so when you propose deals, keep this in mind.  Would you take your deal?  Why or why not?