Dealquest_episode_287_episode_113_Remastered_Solocast_FINAL_AUDIO
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Corey Kupfer: [00:00:00] Do you want your business to grow faster? Are you open to new and out of the box ways to drive revenues and increase value? How do you imagine the most successful entrepreneurs and business leaders double, triple, or expand their businesses tenfold or more? This is a weekly podcast featuring conversations with business owners, executives, and leaders as we reveal behind the scenes details that give you, our listeners, the confidence to pursue your own deal driven growth.
On the show, we discuss a huge variety of deals, everything from large to small. Complex mergers and acquisitions, capital raising, joint ventures, strategic alliances, real estate, affiliate and sponsorship deals, and more, including smaller deals that you can do without significant capital. My name is Corey Kupfer, and I've been supporting deal driven growth for businesses for over 35 years as a successful entrepreneur, professional negotiator, and attorney.
My goal is to help you strategize, plan for, find, and complete deals that will help your company grow faster. [00:01:00] Welcome to the DealQuest podcast. Let's get started. DealQuest community. I'm so excited to introduce you to a remastered episode of the DealQuest podcast. The podcast has grown so much. We started it about five years ago now, at least at the point I'm recording this in the beginning had maybe 60 or 80 listeners per episode.
We now have many multiples of that. In fact, we've got almost a hundred times that. And I realized that there were so many great interviews I did early on in the podcast. In fact, in the first year of the podcast. It wasn't even called a deal quest. It was called fueling deals until we rebranded it. And we interviewed some amazing, amazing entrepreneurs and deal makers and, you know, just amazing stories, amazing content.
And I know that so many of our listeners have joined us over the last several years and may not have heard some of those earlier episodes from five years ago, four years ago, even three years ago. So we have picked the best of the best of those old episodes. And the advice and the [00:02:00] stories and the experiences are timeless.
So we've remastered them and made sure the audio is great and put in our new intro and outro and that kind of stuff. And we're going to be re releasing some of these amazing, amazing episodes. So look out for them from time to time. And here's one coming up right now. Uh, so this is a solo cast of Deal Quest.
And for those of you who. I've not tuned in before, uh, most of the time we do like three guests interviews in a row. And then I do a solo cast. The solo cast tend to, uh, either be a drill down on a particular topic or an overview of what I'm seeing in the industry or our view of deals. This time we're going to be talking about licensing deals.
Okay. Licensing is an underutilized. Um, deal, I think, and I've talked about it in various contexts for speakers with content, but there's so many things you can license. So let's actually start out there. What are the things that could be licensed? And trust me, this is not going to be a comprehensive [00:03:00] list because, um, you know, it's just, there's so many things that could be licensed.
Um, one, if you have some sort of invention, like literally, you know, product invention, things that you've created, something that's patentable, let's say, okay, and I won't get into the details. I'm not a patent lawyer and for people out to patents, um, but, you know, or even if it's not patentable, it doesn't have to be patentable to be licensable, but, you know, you have an invention of some sort.
It could be a mechanical product. It could be chemical product. It could be software. It could be, you know, any kind of, you know, Sort of process. That's all potentially licensable, right? And many of those kind of inventions are the kind of things that inventors will want to license to bigger companies who have manufacturing capability, distribution capability, R and D capability to maybe take the invention to the next level.
Um, and, you know, very often that's a frustrating time because Frankly, in most cases, when a bigger company wants to do a deal for a lot of those kind of [00:04:00] technologies, they'd actually, they'd prefer not to license it. They'd prefer to buy it from you. If they're interested in it enough, they want to be in a position where they own it.
Right. And the difference is if you're licensing to the company, you may, you may even give them a worldwide exclusive, uh, exclusive. It doesn't matter, but a worldwide for these purposes, but a worldwide, you know, uh, in perpetuity license, which means that they have the right to use it forever. Right. So why would they care if they don't own it?
Well, a few things, first of all, it is still a license. Okay, which means that they don't own it, which means that variations improvements changes. Uh, you know, if there's, uh, other technology that changes where they need to modify it, they don't necessarily have the rights to do that. They can potentially negotiate for that within the licensing terms.
But again, if you're dealing with big companies, odds are the deal, they can, they're going to offer you if you want, you know, if they're interested in whatever you've invented. Is we want to buy it for you and we're going to pay you x and that's it. Now, there's sort of a flip where you can, [00:05:00] you can negotiate, hey, I don't only want to get paid up front, even if I'm willing to transfer the ownership of that intellectual property to you, but I also want to get an ongoing royalty.
Right, so it's almost like it's a license back or it could be structured in various ways. It may not technically be a license cannot not really getting to use it. In most cases, it's just actually a royalty payment for the transfer of the ownership to the big company. The problem with that, the reason why big companies don't like that is that.
Then, you know, if you have good lawyers representing you, you're going to want rights to be able to audit, uh, you know, the revenue that comes in to make sure you're getting paid the right amount, get reporting, get inspection rights, books and records, and big companies usually don't like that. So is it impossible to license an invention to a big company?
No, it's not impossible, but a lot, but almost, you know, in the far, far, far majority of cases, they're probably going to be looking to buy it. Now, um, on the flip side, if you are a company that owns a great technology, There may be an [00:06:00] opportunity to license it out to others, right? In non competitive fields or even in competitor fields.
I mean, again, I've, I've talked about this concept of don't always, you know, in, in prior podcast episodes where I talk about, don't automatically rule out doing deals with your competitors. In some cases, it may be the stupidest thing you could ever do, but in some cases, the ability to provide, uh, to work with either competitors or Maybe you have competitors that actually have a much better, um, sales capability, distribution, you know, wide level, whatever.
And as opposed to you only selling this product, you're actually going to make a lot more money. If you license the rights out to somebody else, other scenarios where licenses make sense. I've talked about this, alluded to this in the past. You know, I, uh, I happen to be, uh, uh, president of the New York chapter of the national speakers association, uh, as of, as of now, uh, for this, uh, fiscal year.
And, um, you know, I, I spent a lot of time with a lot of speakers. Many, you know, I'm a professional speaker amongst, uh, my other roles as, you know, [00:07:00] attorney and, uh, you know, and, and, and consultant and author and all that stuff. Well, um, so many speakers, uh, sell their content, right? Basically give it away. You know, the, the company says, Hey, want, want to you to give a talk?
Okay, that's fine, but I also wanna record it. And I want to be able to reuse that or you have a program, a training program, and I want you to come in and train my people. And maybe you're thinking, so I'm going to be smart. I'm not going to just charge my normal fee, but I'm going to charge an additional fee because I'm doing a train the trainer, then they're going to be able to do it.
Well, that's better than the one time fee, you know, or the lower fee if you get a higher fee to train the trainer. But what? All It's very possible and underutilized often, as you can also say, Hey, I'm going to train the trainer, but you know, this content, this curriculum, these, you know, um, handouts, these, uh, workbooks, whatever it is that I've created.
Well, you're going to pay me to train the trainer, but you also need to pay me to license [00:08:00] this material to use it. And that's an annually renewable license, right? If you want to continue to use it next year, you got to pay me again. And there are amazing speakers that do that. Bill Cates is a guy I had on.
Uh, an earlier episode. I don't have the episode number handy, but, um, but, uh, it was, uh, many probably a year ago, uh, who does a lot of licensing and we talked about licensing of content for speakers on that, uh, you know, on that episode. It's super underutilized, right? If you have intellectual property, if you have curriculum, if you have things that you've created that are unique to you, that, you know, you are, you're in, uh, you know, uh, thinking your knowledge, your.
The way your formulations, things like that, licensing is a huge way for you to get recurring income and you know what? It is the fair. I mean, listen, obviously somebody would much prefer to pay you that once and then never pay you again. But the truth is, if they're going to get ongoing value. From that intellectual property, they [00:09:00] probably can't truly pay you enough in a one time thing to be fair, you know, to you, if you really look at the value that you're gonna provide that client, that company.
And by the way, because you're the creator of that intellectual property, you're probably going to continue to evolve your thinking to expand on it to, um, create other formulations that come off of it or that improve it. And part of what you do in a licensing deal is that you can. built in, right? That additional material, that updated material in the licensing phase so that the client gets updated material that they don't end up with a stale, um, you know, system or product or a set of IP a few years later.
So it's beneficial to everybody, even though it's going to cost them more, but I think it's, you know, it's fair. Let's talk about some of the general, and there's so many other examples that I can give, you know, in terms of things that could be licensed. Just think about it this way. Um, anything that is created [00:10:00] by you or your team, and that creation could be something physical, or it could be, you know, something more intangible like intellectual property, it's potentially licensable.
And the question is, who would want access to that? Who can leverage that? That which you've created to create additional income for them. And, um, how can you get paid on going late to do that? Let's take a break from the show for a minute. So I can tell you about an incredible resource. My team and I have put together for you secrets of deal driven growth, creative ways to grow your business, even in challenging times as a powerful ebook that helps you take deal quest podcast episodes and apply them to your own life and business.
This is the ideal tool for anyone looking for creative ways to grow as the. Deal makers and you can get yours. Now, it's as easy as heading to cory cuffer.com/workbook and downloading your cup. While you're there, you can also consider joining our dynamic deal [00:11:00] driven community of founders, experts, small business owners, and entrepreneurs.
Now back for the show. So let's talk about some of the typical questions, terms, things that come up, you know, in the structure of a, of a licensing deal. Um, so the first thing is. What is the licensing fee, royalty, you know, or let's say economic terms. And there are various ways, different industries, all different on how licenses, uh, is done and some licensing deals, there is a lump sum of amount of money up front, um, just, just for the rights to get the license.
Sometimes there's not, um, what is very often, you know, a characteristic of a license is that there is some sort of ongoing royalty or percentage. Um, you know, that that that happens whether or not there's also an upfront, uh, chunk of money that you get paid and that could be paid annually, semi annually, quarterly, monthly, um, you know, it really is all over the map.
Quarterly is pretty common in a lot of industries, but it doesn't have to be. [00:12:00] Um, and, uh, so and so then the question is, what is the percentage of the of the royalty, right? Well, that really varies industry by industry. So one of the things you want to do is you're going to, you know, learn what are the, uh, parameters, what are the deals that are done in your industry, what is the usual royalty rates, you know, for licensing this type of content or this type of invention, uh, you know, and, and, and get a feel for that.
And then obviously some of it's subject to negotiation. Thank you. And then the other question is, you know, because the royalty rights only one part of it, but then what is the base it's so it's, you know, it's gonna be 5 percent to be 8%. It's gonna be 12%, whatever it is, of what is the next question? Well, in most cases, and this is not always the case, but in most cases, it is, If you are the licensed borrower, you're going to want to base that royalty rate on top line revenue.
The reason is because once you get below top line revenue, certainly if you get down to profit, right, you know, [00:13:00] that operating income, EBITDA, any of those other measures where you're subtracting expenses and costs and other things like that off of the top line revenue, There's a lot of ability to manipulate and or control and make decisions that affect that net number.
So that's why most royalty deals, most licensing deals are done as a percentage of gross revenue, or if there's a very clear sort of, let's say, cost of goods sold or other thing that comes off when you get to it. A very clearly defined, easily defined net revenue number where, you know, what's subtracted is very clear so that there's no games.
You could do it potentially off of a net revenue number. Um, and then, you know, as part of that, like I said earlier, you're going to want and it's appropriate to get reporting. Right? Because listen, you are the one, the license or the license E is the company producing the revenue. You don't necessarily have any way to know what they're making.
So normally they're going to send you a report. You're going to be required [00:14:00] to send you a report with your, let's say quarterly payment. And then you're going to have You're gonna want these audit rights to say, Hey, well, they're sending me a report, but how I know the reports, right? And, uh, you're gonna want the right to come in or have a professional come in to audit the books and records.
There's some nuances around that sometimes people will negotiate that right only let's say once a year, because they don't want people coming in all the time it's very disruptive. Um, there's, uh, questions about who pays for that audit. And, uh, and very often you'll negotiate some sort of clause to say, Hey, if the audit checks out and everything's good, well, License or you're the one who wanted the audit.
We were on your problem. You should pay for it. Uh, from the license or point of view, you're going to want to say, well, if we find that the, that the audit is off and that you, uh, oh, you know, that, and that you paid a sex, but you owe us more. Uh, then, you know, we're going to want you to pay for the audit. It gets complex.
Sometimes they say, well, we're not going to pay for it. If it's off only a minor amount, it's got to be off by, you know, [00:15:00] more, or they're going to have a right to sort of test the audit. So there's all kinds of provisions you want to put in around that, but fundamental level, royalty rate on what base, how do you confirm it through reporting and audit rights?
All right. Next, um, big thing is, okay. Is this deal exclusive or non exclusive? And depending upon your industry, depending upon your stage, depending upon, let's say, maybe geography, you may have a deal that is exclusive, or you may have a deal that's not exclusive. And there's some nuances in between. How do you make a decision on whether you should give exclusivity or not?
Well, first of all, um, if you are the licensor, you want to lean towards trying to do non exclusive deals. Obviously, Because if I can do a deal with you, and then I can also do a deal with five other people, I have more upside opportunity, but sometimes that's not appropriate. Certainly not if they're going to be competing, because if somebody's paying you a license fee, they want to know that they have the rights [00:16:00] to, um, use that at least in a particular territory, geography.
Industry segment or things like that. I mean, you can chop it up in whatever way you want, depending upon what the product is, what that's being or service or IP that's being licensed and what the, uh, licensee is going to use it for. Right. So if they are localized, uh, geographically, you might be able to live it that way if they, if you have a technology or IP that can be used in multiple industries, And you know, this particular, uh, company focuses in healthcare.
You can potentially give them an exclusive in healthcare, but still be able to, you know, have other companies use it in financial services, right. Automotive or whatever it is. Okay. So that's another way you can do it. Um, one of the mistakes that I see people make, um, is that they, um, sometimes will grant exclusivity, even if it might be limited by geography, whatever, or [00:17:00] sometimes I see them grant national or worldwide exclusivity without there being any parameters.
And the problem is when you're licensing to somebody, you only make money. I mean, they may be paying you something up front. There even sometimes could be a fixed minimum, right? Quarterly fee. And that's one of the points that that I, you know, that we're going to here is that, um, you ideally as a licensor want to try to negotiate a minimum, especially if there's exclusivity, right?
You know, if there's not exclusivity, maybe you have more flexibility, but even in that case, you probably want some minimums because why are you going to keep that relationship going? You know, if they're not producing anything at all. Um, but the minimums might be lower, certainly for exclusivity. There should be, it's much more important to have minimums and they're likely going to be higher because in order to maintain that exclusivity, the licensee should be producing at least X and X obviously is something that makes it worthwhile to you as a licensor to give them exclusivity either overall or in that geography [00:18:00] or in that industry sector or whatever it is.
Um, I see, it's shocking to me how many licensing deals I see without Transcribed With exclusivity clauses without any, any, any minimums to be able to be met. What happens if the minimum is not met in a licensing deal? And if you're the licensee, that's something that you have to worry about, right? You might, might go in and be pitching to the licensor.
Hey, we're going to make you a lot of money. We can, you know, take this technology, take this content, whatever it is, and really blow it up in this particular area. Uh, and you may make a lot of sales promises. Well, if the licensor is smart, they're going to try to hold your optimistic sales, uh, promises to be the minimums that you have to make, that you have to meet, right, to a, to either maintain exclusivity or maybe to even maintain any rights under the contract.
So minimums could be used to say, Hey, if you don't meet the minimum, then the license becomes non exclusive. So you lose your exclusivity, but you don't lose the license, [00:19:00] or there could be minimums. As well, they could be the same number or sometimes there's a two tier at this level, you lose exclusivity at this level.
We can terminate the contract. Right. Um, and you know, and those are both appropriate things to think about, because again, if somebody is a license E of your product, you want them producing income for you under that license or else why be in it and why not have the opportunity to bring someone else in?
Um, so, uh, there's other things that often come up in licensing deals. For example, um, you may have some obligations, uh, as the licensor to do certain things around, you know, keeping the, uh, the, uh, the brand, uh, maybe let's say, you know, doing some national advertising, uh, and things like that. Now, this is where we get.
Very tricky. You got to be careful because different states have different laws and especially when certain controls come in to place, you could move from what's from a [00:20:00] license to a franchise, which is regulated not only in the states, but also by federal law. So you want to speak to somebody who really understands that, especially if you're going to have certain levels of like quality, like, you know, listen, Okay.
Let's take it easy. Franchise McDonald's, right? Um, you know, or any of the, those kind of food places or, you know, a lot of examples. Let's say McDonald's, right? And McDonald's, you know, you need to have, uh, you know, you need to serve the, the, the things on the menu that are McDonald's, you know, things you can't go out and just introduce your own products without corporate approval.
Um, you know, McDonald's is going to do some advertising for you. There's a way that, you You have to cook these as a way that the store that the that the restaurant needs to look right, you know, the old golden arches or so so many served or whatever it is. Um, you, you are restricted from making certain decisions in a licensing deal.
You don't necessarily have all those restrictions and you, you know, and you don't become a franchise if you're not controlling at that level. But you're going to want to have some standards in there, right? [00:21:00] Because of what you're not going to want to happen is that you don't want a licensee to be, um, ruining your brand, right?
Because it's your intellectual property. You're just licensing to them. And again, they may be not exclusive, uh, or only exclusive in a certain area. So, um, you know, if they are ruining your reputation, because they're Doing something really bad with the brand, you know, uh, uh, or the content or the adventure, whatever, you're going to have clauses in the licensing agreement that will allow you to get out of it.
Um, so you are going to have certain. Controls over the way they do stuff, but a franchise usually has systems in place and many more restrictions to get around, look and feel of locations around the product and how it's got to be produced, uh, limitations on putting other products with it. And things like that.
So, in concept, you hear the difference, but where the line is between a license and a franchise is very tricky. So, you want to make sure you get, you get advice on that. If you're going to do, you know, if you're going to do a license, [00:22:00] um, you know, and different states are different. I mean, I had a client many years ago, right?
It's troubled us in California, especially because they are, They interpret franchise laws, you know, as being, uh, it's a very liberal definition. Let's just say, um, okay. So, um, so what is, you know, who, who are the people, how do you find licensees? Well, listen, or licensors, it depends upon the industry that you're in.
Okay. Um, and, you know, there are, are, uh, different folks, um, You know, they're actually like brokers for M& A deals. There are people who put together licensing deals, license our license, you know, sort of broker those deals. Um, certainly, um, you know, there may not even be, let's say, a regular practice, but doesn't mean you can't create a license.
Remember, if you see somebody who can benefit from your invention, technology, intellectual property, et cetera, there's always an opportunity to, uh, to license it. Um, there are other, I won't get into. details of the other kind of legal protections [00:23:00] that we want in, you know, in the license agreements. But listen, a license agreement is a complex enough document.
You want to get support advice, work with your counsel, work with your attorneys, you know, uh, to do that because there are a lot of things that go wrong. But it's also an unbelievably lucrative opportunity And it is one of the most significant, I think, underutilized deal types that there that there is out there.
I mean, there are certain industries, um, more on the tech side and, you know, on, uh, you know, uh, high tech and that kind of stuff where, you know, it's sort of part of the culture, but there are other opportunities and industries where it could be used and, uh, and it's. It's often not if you have any questions, you want to even just brainstorm about licensing opportunities, uh, you know, in your company, either license out, uh, you know, to be a license or to license out, um, IP or technology, or you think that you might want to license.
Certain intellectual property, et cetera, from another company. And you have questions, feel free to reach out to [00:24:00] us. We do, we do plenty of this, uh, this work and we're happy to help. Um, but just start thinking about licensing as one of the many potential types of deals that you can do. You don't always have to buy or sell the technology, the services, the content, although that may be a very legitimate way to go, but at least consider well, whether this particular thing that you've created may be better, more lucrative.
That you may have more control over it. You may be able to get it out there and earn recurring income from it. If you license it instead, folks, thanks for listening. Corey Kupfer DealQuest podcast. Look forward to seeing you next time. Thank you for joining me on this episode of DealQuest, where we help you understand how deal driven growth can be your ticket to freedom.
I want to invite you to a unique way to tap into the wisdom and experience of the DealQuest community. The Deal Den is a place where entrepreneurs, high level executives, and business leaders come together, [00:25:00] support each other's growth and success, and share what's working best, as well as what challenges we are facing right now.
You will get input not only from From all of our members, we collaborate and serve each other to join us. Go to Corey cut up for. com slash deal day. I'll see you there. I'm Corey Kupfer until next week, wishing you the freedom and financial prosperity that I know your deal quest will bring.
