Your licensing partner is excited about your intellectual property, and you agree to give them global rights. After you’ve signed the licensing deal, you discover they’ve spread themselves too thin. They’re missing production deadlines, unable to deliver products and fail to enter all the markets in their agreement.
Making sure your partner has the right capabilities reduces the risk your partner won’t perform. Always do research on the potential licensee to verify they have the right capabilities, such as manufacturing and distribution already in place. Although a smaller company is very excited about your IP, if the market for your IP is national, it may overwhelm their production capabilities. It’s better to find a larger licensing partner or one that has access to the national marketplace.
When I was licensing the kid’s entertainment properties, many of the “early” licensees were small companies willing to take a risk. Nobody knew if the properties would be hit with the kids. Retail orders initially were small. Then suddenly, when the properties got hot, the retailers ordered big quantities to meet the surge in demand. It overwhelmed the production capabilities of many licensees, who tried to quickly ramp up production. Some were able to meet the demand, and a few didn’t have the resources to fill the orders.
Some key question to ask your licensing partner include:
- Are they experienced with your type of IP?
- Does the IP fit within their sales channels?
- Do they have the production capabilities?
Verify a licensees strength in key distribution channels, whether they use direct sales, distributors or brokers, or some combination of both. Here’s a tip to keep in mind. The use of third-party manufacturers is common in licensing, and if your licensing partner subcontracts production, make sure they have the necessary manufacturing capabilities in place.
The best way to avoid a partner that bites off more than they can chew is to verify their capabilities and match the terms of your licensing agreement with those capabilities. If your IP is a “mass market product”, the potential licensee needs national distribution capabilities. Otherwise, your IP rights can wind up languishing as income opportunities slip away because your licensing partner is unable to perform as agreed.