Getting paid is one of the essential terms in a licensing agreement. Negotiating the right royalty rate makes the difference between generating income and creating a fortune.
One of my clients discovered this the hard way. After they signed their licensing deal, they realized the royalty rate was too low. They were getting paid thousands, while their licensing partner generated millions in sales revenues. They asked me to help them renegotiate the deal, but by that time, it wasn’t something their partner was willing to do.
To help you get the best payment terms for your IP, I’ll share with you 3 of the most significant royalty rate negotiating mistakes and how to avoid them.
A first mistake many IP owners make is failing to negotiate the right royalty rate. If you don’t do your homework, you don’t know what to ask for. You end up negotiating a royalty rate below the industry averages or the value of your IP. To avoid this mistake, do some research to find information on the royalty rates of similar types of IP. Make sure you understand the value of your IP. For example, a market-tested product translates into a higher royalty rate.
Failing to structure the right payment terms is the second big mistake. This mistake is the difference between making some money and a lot of money. One of the best ways to avoid this mistake is with a minimum royalty rate. For example, one way is a minimum royalty as a percentage of sales such as 5% or 6%. That is a common royalty rate in most industries such as technology, medical devices, and electronics. Another option is a fixed amount per unit, a formula often used with a new or unknown technology, when the production costs are high, or profit margins are unknown.
A third mistake is jumping into the negotiations, not realizing that what you know (I.e., know-how) is as valuable to the licensing deal as your registered IP. Also known as a trade secret, it’s protected by keeping it confidential. It creates additional revenue in the form of higher royalties and even consulting payments. An example is a production process that lowers the manufacturing costs and increases profit margins. If it’s critical to making your IP, it worth more in royalty rates.
Once you sign a licensing deal, it’s hard if not impossible, to go back and try to renegotiate a higher royalty rate. The best way to avoid these three big mistakes is to do a little homework. Find out the industry average royalty rate for your type of IP. Be sure to use a payment formula based on a minimum percentage or fixed amount. If your know-how is critical to your IP, make sure it’s “value” is part of the royalty rate negotiation.
Rand Brenner is an IP professional whose passion is helping inventors, startups, and businesses of all sizes use licensing to turn their IP into income-producing products, services, and technologies. His decades of experience run the gamut from medical devices to food technology to consumer products. He’s licensed some of the biggest Hollywood entertainment blockbusters including the Batman Movies (1 and 2), and the number one kid’s action TV show, the Mighty Morphin Power Rangers. Rand speaks about licensing and is a featured speaker at investment conferences, trade shows, colleges, and startup events. His first book, Hidden Wealth: The Money Making Power of Licensing was released in 2019 and is available on Amazon.com. He’s also a published writer with articles appearing in several prestigious trade magazine including The Licensing Journal, Intellectual Property Magazine, and License India. Rand also mentors at the Cal State Fullerton School of Business and Economics and is a judge for their startup business plan competitions.