While the excitement of licensing new products or tapping new markets can be palpable, no licensor or licensee should ever fail to exercise due diligence before entering into a new licensing agreement. While the area isn’t simple, there are some basic things for both licensors and licensees to keep in mind when considering your next big thing.
If you’re considering licensing your product, you need to investigate your potential licensees. One of the most important aspects of due diligence for licensors is the thorough background check. If your licensee distributes a low-quality version of your product or can’t pay you, your reputation and business is likely to be hurt no matter how well-crafted your licensing agreement is. And while you’re busy trying to sue and end the agreement, you’re missing out on royalties you need.
For all of these reasons, make sure you can address each of these issues about any licensee you are seriously considering with confidence before you sign that licensing agreement:
- Competing Products: If your potential licensee handles any products that could compete with yours, proceed with caution. In order to handle this kind of complexity your licensee would have to put forth substantial energy and resources to your product. Make sure they can and will.
- Experience: Your potential licensee needs the right kind of experience with the both your kind of product and the market for it. Due diligence includes making sure the licensee has access to the marketing and distribution contacts they need for your specific license agreement.
- Finances: If your licensee cannot produce, house, and distribute a large amount of your licensed product while engaging in appropriate marketing on an adequately large scale, they will not be able to handle their side of the bargain. Check their creditworthiness and general financial health carefully.
- Reputation: A great licensee will enhance your reputation, not harm it. Make sure your licensee has a reputation for producing high-quality products that meet or exceed your standards, and that distributors, retailers and wholesalers give them high marks.
Don’t think that all of the due diligence is on the side of the licensor, however. Any licensee makes a significant investment of time and money when committing to a new project, so some level of certainty vis-a-vis return on that investment is crucial. Before you commit your business to a license agreement as a licensee, consider these issues surrounding the potential licensor carefully:
- Competing Licenses: Before you sign on you need to find out whether the licensor has other licenses out there for the same kind of product. If they do, will they compete with the one you are considering producing? If they don’t, is this kind of conflict likely to come up in the future
- Intellectual Property Protection: An important piece of due diligence for licensees is assessing IP protection. Find out if the licensed product enjoys any copyright, patent or trademark protection, and if it does, what the nature and strength of it is. You need to know how the IP protection is likely to be challenged and how to protect it (for example, if the trademark is fairly generic it will be attacked on that basis). You’ll also need to ensure that the IP has been properly registered.
- Ownership of Rights: Not every licensor is the inventor of the product you are set to license. Make sure the licensor actually has the rights he needs to enter into the specific agreement you are contemplating, and if he is the inventor make sure that there are no outstanding license agreements that conflict with or limit yours.
- Reputation and Interest: If you’re ready to produce this product you probably love it, but before you sign on as a licensee, make sure everyone else does too. Check to see how it is seen by the public, and if it is associated with any people or groups that might harm its reputation.
- Uniqueness: Does the product you’re about to invest in have uniqueness sufficient to set it apart from other products in the marketplace so it will sell? And is it a trendy product or one that will last long enough to give you a good return?
Remember, no matter which side of the table you are on, due diligence is your most important move. If you take the time to consider and carefully craft your licensing agreement you are, quite simply, far more likely to succeed in your new venture.