Forums: Discussions for entrepreneurs and small business.

Ok, Heres the situation...

I have a design that encompasses several niche markets.  we have the first design prototyped, market identified, a 1 year track history of sales, a sufficient manufacturing operation and a self sustaining marketing program, (customer representatives) the second design prototyped, market identified and ready to get advertised.

this one design with slight modifications will encompasses approximently 4500 + markets. and, it will also have 6 different products for each category.

The product can be marketed world wide and sales prices ranging from $1,000 to $7500.00 the average retail sale probably falling in the $3,000 range.

Through a trusted individual we painted a snap shot of the concept and told him we were looking for someone to take this design and concept to the next step... he put us in touch with his trusted guy who has since contacted us and we have discussed a licensing arrangement, kicked some numbers around and he looks to be a serious candidate for us. we are going to meet in a couple of weeks to discuss the details of the contract and from what i can tell, everything seems to be going in it's proper order.

THis will be a big undertaking for him and his business will be almost completely tied to my design.

he has access to getting my product in retail stores world wide and a team in place to handle retail sales...basically, everything we need. and he is enthusastiac, and sees great potential, is young and energetic but still has 25 years experience behind him in the b usiness..

the things I have asked for hs has agreed to..

the product retains our name

25% (not yet broken down) royalty will be paid... (i'm thinking 15% of the gross sales price and 10% of the profits is reasonable.

the royalty is paid for all products regardless of who designs them, or any variations to my designs,... basically, anything that is sold in the niche markets we are entering...

I get a monthly accounting

everything is done by contract

ithe license is transferable but the terms of the royalties or profit % are not.

the downside is, he can't pay us an advance on the royalties as what $ he has is going to have to go into everything that needs to be done... (development costs are very high) so, i understand not wanting to pay an advance..

but, I am wanting a minimum yearly guarantee of sales and wondering if their is some formula of figuring out what that minimum should be..? SHould it be based on my yearly sales (afterall, it's an exclusive agreement which would prohibit us from making them ourselves) or a multiple of yearly sales?

my sales are growing more every month with a minimal effort or cost so how woud i figure out potential sales and value a minimum for him? we have orders going into next year already but... they are not  completed sales until they are completed.

also, when we license a product,  is it usually the product is one % and the use of the  name another or, is it all the same, product and name.

is their anything i need to know about letting another company use our name?

also, in the licencing contract, should it be kept specifically to "royalties" and product design (we get the final say on all new designs)? or, it is a time to add responsibilities that don't pertain to the product like exposing my marketing efforts? any extra training etc..?

and finally, does 25 % sound about right for something like this?? when we meet, his sticking point is mainly going to be me getting a % of the "profit"... but i cal already see how that could be too subjective for me to be comfortable with. so, I am going to hold at 15-10.

and finally, are their any special provisions i should be making sure are included..??

this is a big thing, or potentially big...  by my calculation, even a poor representation and a mild failure would be more $ than i could earn in 10 lifetimes... I've been working and struggling for 10 years getting this single ddesign and concept to this point and i don't want to blow it now by not thinking of everything but... i can't think of it if i don't know it?

Eventually, i am going to have to see a lawyer (he is going to  be the one initiating the contracts, so i'm waiting before i talk to a lawyer... but before i do, i am hoping the experts at SUN can enlighten me.

thank you,

From what you have divulged in sounds like your royalty rate is a very good one.  Most average royalty rates hover around the 6% - 8% mark based off of the net sales after shipping and any add allowance discounts are taken, so it looks like you have managed to negotiate a rather nice royalty rate. 

I would certainly have a minimum yearly volume in place so that you can hold this company to the fire to move your product line.  You should use a standard stair step process and be reasonable about it.  Run some forecasts based on product movement and introductions and then gradually step it up over the following years until you get to a bottom line volume amount which will stay continuous over the course of the agreement.  For example:  Year 1 - 100,000 pieces Year 2 - 250,000 pieces and Year 3 and on a minimum of 350,000 pieces per annum.  Remember these are not "goals" but "minimums" that this company will have to abide by.

I would also structure in some milestone rewards to where you gain an extra percent if the sales of your product line grosses over $1M per year or you get a milestone payment of x% based off of the Gross Sales which runs anywhere from 2% - 4% of Gross Sales. 

Also, is this an exclusive or non-exclusive agreement and what is his market?  If he only wants an exclusive in the US then you have the right to go and put a deal together with someone in Canada or the European Union for instance. 

I would also place a buy out stipulation into the contract so that you are covered if a third party comes in and wants to buy out the product line.  Usually this is done on a stair step basis as well.  Year 1 - 3 40% Year 4 - Year 6 30% and any year thereafter 25% of any buy out offer after closing goes to you.

Just some general thoughts.  I also wouldnt get an attorney involved until you have successfully negotiated everything yourself and then only bring the attorney in to structure and draw up the agreement.

Michael

thanks Michael

i hadn't thought about a milestone reward and minimum performance stipulations.. i was thinking of a reverse milestone reward ie: sales = x, my % of gross sales get's reduced or reworked to % of profit or i even take a little less if spectaular performance is accomplished... asking for more does seem to make more sense:)

yes, it's an exclusive contract world wide for this one general product design. I want to hold other designs and markets in reserve until i see how this goes...

would a buy out stipulation be the same as if the company went public or, this guy just brokers this license to someone else? does that all fall under the same category? can you elaborate on this stair step formula?

I would structure the milestone reward so that its not complicated and is based on pull through sales of the product line in question.  You could do the following:

1M in sales = 2% - 2M in sales = 3%, etc.  or structure it to where you gain an extra % on your royalty rate.  There are several ways to accomplish this.

In regards to the buy out, it doesnt matter what happens, i.e. brokered buy out, product line buy out, third party buy out.  If your product line has anything to do with a buy out then you should recieve a certain percentage of that buy out.  Obviously, his company could get bought out which could involve several product lines in question and this brings up another question, but for now, you would get (x)%) of the sale if your product us deemed an asset of the buy out.  I would also structure something into the agreement that states, if a company does change hands, whether through a buy out or not, the same terms and applicable agreements still apply and would transfer to the new ownership. 

You will also want to make sure this company is giving you monthly computations and data in regards to product sales, selling price, discounts, etc so that you are not left in the dark and just assuming they are paying you correctly. 

You will also want to include in the agreement a mutual beneficial time frame to review their accounting.  Usually happens not more than once per quarter or a couple times per year. 

Thanks

Michael