Licensing And The Real World

Why should a successful company pay a royalty and probably an up-front fee as well, to acquire the "rights" to an unproven product? Good question - simple answer. Because all companies need new products, be they extensions of current product lines or new items targeted to existing markets, to stay competitive and to stay profitable. In many cases, licensing can be the easiest, fastest and least expensive way to acquire these products. "Business has only two basic functions - Marketing and Innovation."

-Peter F. Ducker

Both functions have the express purpose of generating sales, cash flow and ultimately profitability, the final measure of value for the owners of any business declines. While most businesses are fairly good at marketing, far fewer have mastered the intricacies of innovation. The reality is that management's time and efforts are primarily occupied by operational functions. Every business owner or executive knows they need new products, but they seldom find the time to address this all-important issue.

The downsizing and restructuring of American business over the last two decades has left very few small or mid-sized firms with anything resembling a realistic R&D department. So the new products that a company brings to market, are usually the result of either a long and drawn out development process, often punctuated by numerous dead ends and false starts, or are acquired from sources outside the company. The benefits of taking the latter approach, particularly through the utilization of a licensing agreement, can be substantial.

Executives are left to handle that which they do best. The company no longer wastes time and financial resources trying to come up with next year's exciting new product. Instead, the company that lets it be known that they are open to licensing new products, now has at its disposal, the entire universe of independent product developers. Upfront payments for most licensed products are far less than most companies would spend to have even a single employee R&D department. Royalties are no more than revenue sharing - after the sale is made. After all, when a business partner provides an opportunity to generate income that a company would not otherwise have, paying out a small percentage of those revenues to the partner is just smart business.