You have a terrific idea for a new product. You’ve been working from home, making it yourself with a few friends in the garage. Now it is time to expand. But how? This question eventually plagues any growing business, whether you’re selling a software solution, baby toys, or hand-painted martini glasses, as in the case of Designs by Lolita.
The most common way to grow a business is by overseeing each and every aspect of the company, the “ground up” method. Most Fortune 500 companies began as small start-ups whose entrepreneurial founders slowly developed the infrastructure, hired the staff, sourced manufacturers or built their own factory, and created distribution, sales, and marketing plans. Every facet of the business began and remained under the company’s direct control (until they went public.).
Or you can go another way: licensing your idea to an established company that pays you a fee. With this scenario, you still control the business; you just don’t do all the work. (This differs from a royalty fee, in which you sell your idea outright in exchange for regular payment.) Which option you choose – “ground up” or licensing – depends on a variety of factors, including risk, initial investment, and time to market.
Pros of Creating Your Own “Ground Up” Infrastructure
If you are an operating person who loves the idea of owning the road you travel to success, then your choice is clear: Build your business from the ground up. My husband Stewart and I are operating people, and I bet for every other entrepreneur who falls into this category, the following benefits far outweigh the headaches associated with running a vertically integrated company.
* Profits. With no partners to share the profits, you reap 100% of the earnings. After tackling all the work solo, you’ve earned it. Also if one vendor is working to your standards or your price point you can move to a new one of your choice. You have totally flexibility in meeting the demands of a changing marketplace.
* Brand Integrity. No quarrels, no brainstorming ideas on brand direction. Because you alone control the product, you have final say over all aspects of the brand, which means you have sole control of its integrity. With licensing, even if you build watertight clauses into your contracts, your idea is never as soundly protected as when you keep it to yourself.
* Quality Maintenance. In a licensing business model, you have to make sure that your partners are honest and respect quality and integrity. Quality control was just one of the reasons that Monica Williams of Pacimals cited for not being “ready to sell the idea” and sticking with an in-house infrastructure.
Pros of Licensing Your Idea to Partners
You may be a genius at design but not a good manager. In that case, the problems associated with building a business will zap your creative spirit. Or you may be a brilliant marketer and designer who doesn’t want the headaches of operations, in which case you would seek out franchise partners who can assist you to the growth stage you desire. If the following benefits appeal to you, a licensing plan may be in your future.
* Workload. Under a licensing agreement, the licensee (the one who licenses from you) handles all the manufacturing, and perhaps distribution and sales. In some instances, they may even handle the marketing Keep in mind that although covering more business aspects means less work on your end, it also means that the licensee takes the lion’s share of the profits and decides the cost of goods.
* Time to Market. Because a licensing business model allows you to have multiple partners (for production, distribution, etc.), you can speed up both your time to market and your company’s growth. This is especially important if your idea is timely, such as if it is tied to a specific event (Olympics, an election) or trend (the boy band du jour).
* Initial Investment. Compared to in-house infrastructure costs, a licensing business plan requires a much smaller investment on you part.
* Using Your Strengths. With your partners covering other areas, you have more time to dedicate to your strengths, such as design or developing back-end products. Once she struck her licensing deals, Lolita, of Designs by Lolita, used her newfound time to expand her product line and to focus on marketing and sales. Manufacturing wasn’t her forte, so she left that to her partners, while she forged ahead with the parts of the business to which she brought real value: marketing and design.
Still stumped as to which route to take?
It is a complicated question that shouldn’t be taken lightly and that will differ based on each individual company’s business goals and expertise. However, if you read my past Ruby Tuesday and Ask Lynda interviews with Williams, who chose to create her own infrastructure, and licensing maven Lolita, whose company pulled in more than $54 million in 2008, it may give you further insight.
To license, or not to license?
Understanding your talents and business goals is key to the decision-making process. Neither option is universally right or wrong. It all depends on which option is the best fit for you.