Licensing VS Manufacturing

Inventors Digest posed a seemingly simple question to me in this article: Which do you think is the better route for inventors – licensing or manufacturing?

http://www.inventorsdigest.com/?p=2927
The answer is complex because it begs more questions. You need to decide which route to take early in the process. To do this, you have to take an honest look at your idea and yourself.

Do you have the ability, resources and business savvy to manufacture and build a company around your product? Or are you better suited to license it? Building a business around a product reaps you a larger share of the profits, as well as greater control over sales and marketing strategies.
But you’ll also have the lion’s share of the risk, including inventory expenses, personnel hiring, quality control, returns, late shipments, contract breaches, knockoffs, patent-infringement issues, long hours and a large monetary investment. And it all could end in financial ruin if your product doesn’t sell.

Another thing to ponder: Are you willing to work your current job while getting the business off the ground or quit your job and put it all on the line? Likewise, if you have investors, you’ll have to decide what equity the investors get in the company. Investors expect to have a say in how the business is run.
Licensing means you’ll receive a smaller proportion of the profits, normally 2 percent to 8 percent. But you have the least amount of risk and monetary investment. Licensing requires you have to find a company willing to license your product and fund it.
You’ll more than likely have to pay for a patent search, patent, prototype, presentation and legal fees. You’ll have to do this if go the manufacturing route, too. If you hire a licensing agent, whose duties include making calls to companies and negotiating contracts, you’ll have to pay her or him a percentage of the license.

You are largely at the mercy of the licensing company’s marketing and sales practices. Companies often change the product’s design to fit their vision of what’s marketable. You have to wait 30 days after each quarter to see if your royalty will be what you hoped. All the while you may be wondering if the company is pushing your product as hard as you would if you ran the company.
Despite all the caveats with licensing, I have personally favored this route. I have more than 240 products in sell-sheet form, ranging from kitchen and eyewear to lawn and garden. Each of these categories has its own set of rules and structure for getting to market. Just learning how to navigate each industry is a challenge on its own.
Manufacturing it yourself and licensing each has its rewards and pitfalls. Regardless the route you take, be as informed as possible, set realistic expectations and minimize your risks. You may be able to fool yourself about your product’s chances. But in the end, the consumer will be the final judge.

Check out http://www.rogerbrown.net

Roger, thanks for this info it is very helpful and it is in line with what I have heard recently at the Minnesota Inventors Congress Event.

However I do have a question. It is apparent that if you are lacking funds or capital investors Licensing is the way to go at first. So is there a business model out there to help someone with the required research that would help them get the best possible "royalty fee" I have read that the normal range is 3% - 5%, with the occasional item getting as much as 10%. I have a working model and a video in place and my patent paper work is ready to be filed, but I just want to make sure that I have done enough ground work that will allow me to better negotiate the roayalty fee. I was even thinking of having a few "presales" just to show that the item does indeed have interest in its market.

I am also wondering if the royalty fee is based on the items sale price or the final adjusted profit - big difference here when doing the preliminary numbers.

Steve the more you bring to the table the better your chances of success. That being said, every company has its own policy for what they are willing to pay. Your task is to get the best offer negotiated. As with any deal each side wants as much as they can get. The company will send you a contract. Look it over and highlight any areas you have questions on or think should be addressed. The company will either agree or make a counter offer. You have to decide what is in your best interest and make a decision.
Just remember that you can also kill a deal if you are unrealistic in your expectations and make demands no company would accept.