The number one goal of the due diligence process for the IP owner is to identify the best possible licensing partner.
Due diligence helps you decide if your potential licensing partner is qualified and has the capabilities, such as manufacturing and distribution,in place to successfully commercialize your IP. A good starting point for the due diligence process is requiring the potential licensee complete a licensing application. The licensing application will give good background information, and show any potential issues. This is the fastest way to learn about the company and it’s experience.
When I was licensing movie and TV shows, the first thing required of every potential licensee was the licensee application. It included references for retail buyers, distribution and banking, which I always checked. Plus they had to provide their plans to commercialize the IP.
Determining if the IP fits the capabilities of the licensee is the first step. Not only can it cut the risk, it also makes it more likely that the potential partner will consider the licensing opportunity. For example, if the IP is a “mass market product” then a potential licensee must have national distribution capabilities. Although a smaller company may fit in every other area, you have a choice to make – trade-off a good fit and the prospect of a good working relationship for access to a larger market. If the market for your IP is national, it’s better to find a larger licensing partner or one that has access to the national marketplace.
You’ll want to find out about a partner’s experience with licensing. However, keep in mind that experience with licensing should not necessarily being required. Often times 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. Talk with other licensors working with the licensee, as well as retailers and banks, to get as much insight into the partner as possible.
Once the research is complete, you’ll want to make sure that you can work with the licensee. It’s important that your licensee(s) shares the same vision or goals for commercializing your IP.
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 and money then having to litigate your way out of a licensing agreement. A little research before signing a licensing agreement will go a long way in making sure you create the right licensing partnership.