You’re in the door! You’ve almost made it! If you’re in the processing of negotiating a licensing deal with a company, then please read the following advice carefully.
First, know that the person with the most information is usually the winner. Knowledge is power, and it’s definitely leverage. So research the company you’re working with. Where do they stand in the marketplace? What are their strengths and weaknesses? Who do they sell to? Do they need you more than you need them? It’s important to know the answer – determine it through research. You should also ask the company about itself. You’d be surprised at what you can learn. Get the basic information you’ll need later, early on.
Make sure that you’re submitting your idea to multiple companies. If you’ve got options, you’ll be less desperate, and less likely to accept a weak deal.
Know what you’re looking to get out of a licensing deal. You need to be prepared to answer the company when they ask you. But in order to have a response, you’ll need to ask them a few questions first. One, do they want an exclusive? Second, how many units do they think they will sell? And finally, at what wholesale price do they plan to sell your product? These three answers will determine the type of royalty rate you ask for and the terms of the deal you select.
I don’t recommend negotiating on the phone. Most people aren’t capable of doing so. Send a terms sheet over than clearly illustrates your desires. And in that first term sheet, ask for more than what you hope to receive. You’re going to have to make concessions – so why not leave some concessions that you’re more willing to make up for discussion? You want them to feel as though you’re giving up something, because they are too. And have answers for the terms you choose. Why do you deserve that royalty rate? Why is that channel of distribution most appropriate? Negotiation is all about giving and taking.
When they respond to your terms sheet, don’t flinch if they express surprise. Hold your ground. Basically, don’t let them see you sweat. The answers for the choices you’ve made will support you.
A few final tips to remember when negotiating a licensing deal.
It isn’t personal. Try analyzing the deal from the other party’s perspective. Ultimately, you both will need to work together to win. Be flexible. You may think that what they’re asking for is outrageous or ridiculous, but it might not be. Don’t assume anything.
Minimum guarantees are powerful. Everyone always obsesses about the royalty rate, but if your product doesn’t sell, it doesn’t matter how great your royalty rate is. Try to create a minimum guarantee for the first, second, and third year. Increase the minimum number of sales they must make to keep the agreement each year. You’re reducing risk for them, but also risk for yourself.
Be practical. Make sure whatever you ask for is realistic and appropriate. Instead of an advance upfront, consider asking the licensee to pay for your patents (and any future ones). You’re trying to create a great working business relationship.
Be able to walk away from the deal at any time. Don’t intricate yourself so deeply you can’t get back out without serious repercussions. The best way to do this is to rely on other options or other deals. Maintain some sense of leverage. Negotiation is about power. If you let the balance of power swing horribly out of whack, you’re much more likely to be taken advantage of, or accept a poor deal.
Remember, each party should walk away from the table having won something!