So you’ve got a great business idea but you’re not ready to launch a business (got no money and no time) what can you do? You can sell your business idea to big companies or investors that will pay you upfront and then take the item to market.
This form of business model is called licensing. It involves you receiving licensing fees and being paid royalties on product sales because you are allowing others to profit from your intellectual property i.e. your business idea.
This article will explain the two most important parts of this business model, the first being how to sell a business idea to either a big companies small businesses or investors and secondly how to protect your idea and defend it from being stolen while you pitch and present your proposals.
I will discuss in depth how to protect your business idea with and without a patent if you have a small amount of money or no money practical suggestions based on industry standards.
If your business is already launched and operational and you desire to sell your company without a business broker yourself – check out my expert step by step plan here.
- Part 1: How to Sell a Business Idea to a Company or Investors
- 3 Steps to Sell Your Business Ideas & Inventions
- Specific Industry Tips
Part 1: How to Sell a Business Idea to a Company or Investors
How to Present a Business Idea Without it Getting Stolen
First order of business while pitching your product idea to investors or companies is to make sure it does not get stolen!
Here are my top three recommendations to protect your business idea from dishonest investors:
- Provisional Patent – Contrary to popular belief you do not need to be issued a patent to protect your intellectual property. You can start by quickly getting an inexpensive provisional patent that will allow you to mark your invention as “Patent Pending”. My clients are shocked that for under $200 at Legalzoom they can get this level of Federal protection!
- Trademark – Another way to provide protection to your business brands and product names is with a trademark. For just a few hundred dollars (get the deal here at Legalzoom here) you can greatly expand the legal protection to your brand. When you register your trademark it puts the public on notice that you intend to use your brand for commercial purposes. You are granted the exclusive right to use your registered mark on goods and services.
Get more information and read my full review of Legalzoom trademark services here.
- Copyright – Original ideas such as board game graphics, books, and ideas for screenplays can be protected by copyrights. Once you register your copyright you establish public record which helps support your claim in potential infringement claims.
PS Our friends at Legalzoom are giving away for Free! this copyright license agreement you can use to license artwork
Check out my in-depth post on how to protect your business idea from getting stolen – without a patent
3 Steps to Sell Your Business Ideas & Inventions
Here I will break down the three steps on how to sell your business idea whether it is an invention, a product board game or manufacturing process.
By licensing your invention or business idea you are selling the rights to a company to develop it into a saleable commodity. The buyer is performing all the necessary actions to take it to market by using their financial and human resources.
Licensing or selling your business idea can be an excellent way for cash-strapped entrepreneurs to get started making money from their inventions.
Step One Research Market
You need to be equipped with data about your market to demonstrate the commercial value of your invention. Do this before you begin preparing your proposals and presenting to investors.
- Marketplace Intelligence – Begin by researching your intended market including existing products and services to determine where your invention fits in. What gaps in the market are your product serving? Create a database of all similar type products, company data on who is producing and retailing, and distribution channels.
- Focus Groups – Experiment with customer focus groups using friends, family, or neighbors that match the target customer demographic for your product. Reports of these groups’ reactions and feedback will be an excellent addition to your investor presentation.
- Legal Research – Do some initial (free) market research on the patentability of your business idea. Start with a patent search on the government website here This will an overview of patent grants.
- KNOW that patent law is very complex and often a quick (untrained) search will often not give you all of the information you need. I recommend that serious investors hire reasonably priced (under $200 at Legalzoom) professional attorneys to do an initial patent search. This will save you tons of time and hassle. You need to know if there are other similar patents granted presently. It is surprising how inexpensive this can be and how much good information can be obtained.
- PLUS including a professionally prepared patent search in your pitch presentation will impress investors. It shows that you are serious and will answer many of their questions and objections to your product licensing proposal.
- For less than a cheap television set, you can get a “patent pending” designation from the US government. These two small words “patent pending” will be gold when you negotiate licensing agreements.
- Manufacturing Production – Take time to research the production process that your invention will require to bring to market. This information is an important section of your proposal. Also, you may identify potential investors or partners during this research phase. You may also find out this information during your product prototype process.
Note on Product Prototypes
While creating a product prototype can be a powerful persuader to potential investors, it is NOT required to sell your invention. What IS critical is the research on how a product will be manufactured.
Sure professionally crafted 3D prototypes are cool but they are also expensive and take a long time to create. Effective product prototypes can take many forms. One of the best product prototypes I created for my business was a handmade bottle of skincare moisturizer.
You see, I wanted to test my business ideas of expanding my existing cosmetic line into men’s products. So I handcrafted a few samples of proposed products and presented them for sale at our annual trade show. Then I took orders for future delivery. At the end of the show I could easily gauge the interest from my market buyers. Yes they loved it Thus my $20 handmade prototype generated thousands in profits.
Step Two Prepare Proposal
Now that you’ve gathered all the research information from the bark including market research, focus groups, and production processes, it is time to prepare a professional presentation for companies investors.
While a product prototype, functioning or not, can be an asset a professional presentation is the most important.
I recommend a short succinct document of up to 2 pages that clearly states the necessary information detailed below.
Make the document easy to scan and understand for non-technical readers who are unfamiliar with your invention. Make liberal use of charts diagrams and images to visually communicate important points.
Your products features and benefits
There is a distinct difference between a feature and a benefit. A feature is something that is intrinsic about the idea i.e. that it is blue that it is made of plastic that it is 6 inches tall.
While a benefit is a more important value proposition of what the idea or service gives to the end-user.
Solution your product provides
This is a critically important point that many people forget. You must discuss the exact problem that your product or service solves which will allow your investors to understand the need for your product to come to market.
Detail the market demographics of your target customer, age, gender, location, lifestyle, buying habits and hobbies to create a customer persona.
Legal status of your idea
Add details about the current legal status of your product. What patent and trademark searches have been conducted either by yourself or professionals. What were the results of those findings? Do you have a patent-pending or provisional patent? Remember for a few hundred dollars you can get “patent pending” on your invention at Legalzoom.
Also, write a cover letter to introduce your proposal and yourself and your professional qualifications to investors.
Step Three Pitch Investors
Now that you’ve done your research and prepared your presentation you are ready to start contacting prospective buyers. But first you will need to find them! Here is how to create a list of prospective investors or licensees (buyers of your product invention license rights).
Of course, just like all sales processes this is a numbers game. The more contacts you put in your database the more success you are likely to achieve.
I suggest that you begin with at least 100 prospective targets. Please Don’t just come up with two or three companies – you think will be perfect – and contact only them. You are very likely to be disappointed. Successful entrepreneurs cast a wide net to get more investor fishies.
How to Find Prospective Licensee Companies
- Shop retail stores – if your invention is a consumer product go to the related marketplace stores and look at similar products and take note of the manufacturers, distributors and retailers. All are possible buyers of your business idea.
- Browse online stores – search online stores and jot down manufacturers and companies that could be a good fit for your invention license.
- Find trade associations – explore industry trade associations for your product categories and get names and contacts from many firms from one source. Find your related trade associations here.
- Attend trade shows – Visit industry trade shows to meet prospective buyers (and research competitors). If you are unable to travel to trade shows, simply go to the show website and access the list of exhibitors. Check out this list of trade shows by industry
- Visit your local library – most libraries have links to professional databases that will allow you to search industries and obtain lists of companies and executive contacts.
- Online industry databases – visit top industrial databases such as Hoovers and Thomas Net that list large companies that could be interested in your inventions.
- Manufacturer’s representatives – these are the firms that represent many companies and could be a good source of connections. Look through the manufacturer representative directory here.
- Distributors and brokers – these firms also have connections with many companies that could be your ticket to licensing deals.
- Linked in and social networks – Search in social media sites for company on Linkin and other social media sites. Use keywords related to your product idea.
- Import export firms – these companies work with domestic and international firms that could be a good fit to bring your product idea to market.
- Industry forums – join online forums related to your industry and look for active posters and profiles of possible business partnerships.
Refine Your Target Database
Now that you’ve got at least 100 possible buyers, using the techniques listed above, let’s start to refine your list. Prioritise your list into the best prospects to start your campaign. Start contacting companies in the order below:
These firms have excellent distribution channels and the needed capital to consider outside product submissions. Many of them also have formalised submission processes. Here are the top 100 global licensors.
Small companies can often be excellent targets because they do not have in-house inventors and are often looking for ways to expand their market.
You have the advantage of proximity plus possible contacts through friends, family or neighbours which will allow you to set up in person meetings which can prove extremely profitable.
Companies with similar products to your invention are a good bet because they may be interested in expanding their line. Your invention could be their perfect next product launch.
Make a Deal
You now have everything in place to get busy selling your business idea!
Next learn about industry standards for licensing agreements and payments.
Add note about negotiation here
Begin by negotiating a deal that is a win-win for both you and the manufacturer. In many cases, this could be the beginning of a long term partnership. You will continue to develop new inventions and this manufacturer may continue to purchase them.
My father had a 20-year long business licensing relationship. He was a graphic artist and would design products that this company would manufacture and sell paying him royalties.
Four Main Parts of Payment Licensing Agreement
This is the assignment of rights payment that is paid at the beginning of the contract. Most cases it is an outright payment but also could take the form of an advance against future royalties. Most upfront payments cover the cost of patent searches and filing.
These are ongoing payments that are made to the product inventor or business idea generator based on a percentage of the product sales. The average royalty ranges from 2% to 5%. This means that you will be paid 5% of the wholesale price of each unit sold. Note I said the wholesale price not the retail price. Which means that if a product is sold for $100 in a retail store the wholesale price is likely $50 and that is the amount that will be used to calculate your royalty payment.
Royalty payments are absolutely the most important part of your licensing negotiation. This is because they are ongoing and directly relate to product sales. You get the advantage of ongoing income and the manufacturer has the advantage of paying you only when the products sell.
When I sold my cosmetic company I negotiated a profitable royalty deal in addition to an upfront payment. I accepted a lower upfront payment for a higher royalty fee. This worked out very well in the long-run because the cosmetic line is still selling well a decade later – and I continue to receive royalties.
This is a part of the contract that requires the buyer to pay the inventor a minimum amount of royalties annually regardless of the amount of product sales generated.
This is an important element in your contract because it incentivises the manufacturer to promote the product adequately ensuring strong sales.
Most manufacturers will request exclusive rights to your product internationally. You can negotiate this country by country as you deem appropriate.
Specific Industry Tips
How to Sell Your Board Game Idea
An expert in board game licensing, Scott Morris is the President of Passport Game Studios, a board game publisher based in the United States recommends that creators create a video of their game in action.
A short action-packed video showing how to play your game, what is in the box and player experiences will impress and excite investors and retailers about your cool new board game idea.
Contact the top board game distributors in the USA:
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Check out my guide on how to start your business right with tons of useful tips I learned by successfully starting, building, and selling multiple companies.