One of the biggest mistakes in licensing is not doing due diligence before signing the licensing deal. Ending up in a reactive deal because an opportunity presented itself may seem like a good idea at the time. But don’t assume that a licensing agreement will take care of any problems that “pop-up.” Nothing is more draining in both time, money, and lost income opportunities than having to litigate your way out of a licensing agreement.

I consulted with two inventors who licensed their invention to a company run by their former CFO. But they didn’t research the company and verify it had the resources to get the product into the market. Only after they signed an exclusive deal did they discover the company didn’t have the money to produce the product. They were stuck in an exclusive licensing agreement and, rather than go through costly litigation, waited until the company failed to meet the performance benchmarks to terminate the contract. It took them several years to get their IP rights back.

The starting point for every licensing partnership begins with the due diligence process. This step is often overlooked, yet it’s a critical and essential when considering a licensing partner. It’s the process of getting as much information as needed about the potential partner. The more you and your prospective licensing partner know about each other, the better you can determine if the partnership makes sense.

If they are a startup or new to the market, a key area to verify is their financial resources. You want to avoid licensing a company that may wind up in bankruptcy. That is particularly important if you’re doing and exclusive license. If they go bankrupt, it’s time-consuming and costly to get the rights back. Even though your licensing agreement includes a clause that terminates the contract, if the company goes bankrupt, it is hard to enforce. Your IP is considered an asset of the company, and you’ll have to go through lengthy bankruptcy proceedings to get your rights back. Making sure your licensing partner is financially sound is the best way to avoid this risk.

You’ll want to find out about a partner’s experience with licensing. However, keep in mind that experience with licensing should not necessarily be required. Often licensing is a new strategy for a company, which means your IP would be the only fish in the pond. Other areas to research include their product or service quality, company reputation, and whether they sell competing products. If they are working with other licensors, talk to them. Also, if possible, retailers and banks, to get as much insight into the partner as possible.

Once the research is complete, make sure that you can work with the licensee. Your licensee(s) must share the same vision or goals for your IP. The right partner is not necessarily the one offering the most money. The right partner is the one who can nurture your IP, build your licensing program, and create long-term cash flow and profitability, not the one who promises a lot of money upfront. In many cases, that kind of partner will only get you a quick in and out of the market.

Remember, there is a life cycle for everything. Ultimately, if your IP has long-term potential, small initial gains could result in the most profitable licensing deal. Do your homework and make sure this potential partner has the money, workforce, and resources to get your IP into the market successfully. A little research before signing a licensing agreement will go a long way in making sure you get the right partner and help ensure your best chance of market success.

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