Advantages and Disadvantages of Licensing Rights to the Company’s Production Process | Small business

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Through Updated on February 04, 2019

Patenting a production process prevents other companies from using your techniques. However, you can license your processes to other companies, whether you make cars, chemicals, clothing, or cheese. Sharing your intellectual property (IP) rights can be profitable, but there are also risks you need to consider.

Reduce your risks

It costs money to manufacture products yourself. If you license your process to another company, you are not committing your own money and time to produce the goods. The licensee does this while you receive royalties. This can be a great deal, especially if the actual manufacturing is outside your company’s skill set.

Licensing allows you to take advantage of the process while keeping your business focused on what it does best. Even if you use the process yourself, you can make a profit by allowing it in other countries or states, rather than trying to expand yourself. All legal and financial risks are borne by the licensee, not by you.

The wrong side? The licensee can potentially become a competitor. It is also possible that they lower standards, produce poor quality products and tarnish the reputation of your process.

What kind of deal?

Your IP license takes negotiation. Lots of negotiation. Whether or not the license is beneficial to you depends on the quality of the deal you make. You need to have a clear idea of ​​what you want to gain and the other party’s goals. To consider:

  • Do you offer an exclusive license or can you license the process to other companies?
  • What is the best result you can get from this deal?
  • What results do you want to avoid?
  • How will this deal make you money?
  • Do you only offer the technology or will you train people to use it?

Negotiating technology licenses is complex, and you may need to pay experts to represent you.

If you underestimate the value of your process, you risk settling for too little or giving too much. Many licensees will ask for exclusivity, but is that a deal breaker? Signing an exclusive deal too quickly can cut you off from potential profits down the road.

Losing control of your rights

One of the risks of IP licensing is that you lose more control than you expect. Suppose you grant the licensee the right to assign the license to someone else. A large company buys the licensee and, presto, it claims the right to use your process.

Another possibility is that the licensee goes bankrupt. At the bankruptcy hearing, the license could easily be assigned to one of its creditors. Negotiate to avoid this. For example, you can insist that if the business becomes insolvent or bankrupt, the license automatically expires.


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