Licensing out one of your products to be made by someone else can create a good stream of earnings for a small manufacturer.
Licensing out some of your manufacturing could boost profits
It can enable such firms to focus on their newer lines or best-sellers, while other companies make and sell some of their older or secondary products.
Here, intellectual property expert Julian Nolan lays out some of the factors you have to bear in mind.
Paul Elliott, UK
My company makes a number of formerly high volume products, which are now selling only in low numbers. Can we license them out?
Julian Nolan, intellectual property expert
As products evolve and reach the mature part of their lifecycle, they can become increasingly disruptive to manufacture.
Reduced volumes and obsolete components are just two of the factors that may soak up resources for products whose strategic importance is fading.
Simply discontinuing these products, however, can be problematic.
There may be dependencies with other products, unmet customer demand and an associated reduction in revenue.
Licensing out the intellectual property associated with your product can provide continuity of supply for your customers, while generating a licence-based income for your business.
One of the first questions to consider is, who could be the licensee?
This means finding a company that you want to work with, which will find the licence of value.
Potential licensees may include companies with products in adjacent markets, existing customers for the product or even one of your competitors.
As well as identifying a licensee, it is also necessary to think about the scope and nature of the agreement and its implications.
Things to consider include:
Will you need an associated supply agreement so you can continue to supply your customers or will these customers purchase directly from your licensee?
If your existing customers will still buy from you, who will buy from your licensee?
It is essential to plan the transfer of technology and, if appropriate, equipment between your company and the licensee carefully. This can be a major cause of problems for the unwary.
Consider whether the cost of technology transfer, component obsolescence issues or other problems mean that the agreement will be uneconomic.
Might it be better to look at other options, such as outsourced manufacturing?
What will be the initial duration of the licence and what will happen at termination to the equipment etc.?
Will it be an exclusive agreement or are there opportunities to license the product more widely, perhaps across different territories?
Will there be any associated trademark licence, possibly relating to the product name?
By proceeding carefully and taking professional advice where necessary, licensing can be a useful tool to divest mature products lines and generate royalty income.
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