Consider Aftermarket Licensing
If your top potential licensee group isn’t biting, know your plan B. This week, we’ll take the next step in our journey From Potential to Pitch and examine aftermarket licensing.
Albert has great leads and a good strategy for approaching original equipment manufacturers (OEMs) for licensing agreements for his motorcycle bra patents. But if those efforts fail, he still has options. I suggested that he contact aftermarket manufacturers if OEM deals failed.
Surprisingly, aftermarket manufacturers and distributors for motorcycle accessories may provide quicker time to market, since they have much smaller reach. They are likely to have slower and smaller market penetration for the same reason, however.
Warning! There are a number of potential snags in negotiating in this platform and I strongly recommend professional help with these scenarios.
Aftermarket Licensing Can be Tricky
- One downside to dealing with these smaller aftermarket players is that negotiations can become cumbersome because of the fragmented nature of the marketplace.
- A second hurdle is the need for more research to determine the extent of any existing relationships that these providers have with OEMs. Suppliers are likely to have strong relationships with OEMs and may be less receptive to an aftermarket pitch.
- In the case of an aftermarket supplier that does not provide both manufacturing and distribution services, Albert could end up in the position of trying to connect the two. This is doable, but a logistical nightmare. In such a scenario, there is a possible financial benefit by extracting royalties from each of the parties involved. The sum total of the separate royalties could easily exceed the amount that could be obtained from a single integrated source. Messy, but possible.
I suggested approaching aftermarket manufacturers and distributors after approaching OEMs, although in some circumstances, it might make sense to approach both simultaneously.
- Direct pitch to owners and general managers.
- Develop a team of manufacturers and distributors if they are not already integrated.
- Gain customer endorsement of the motorcycle bra through demonstrations.
- Establish compelling reasons to license, including:
- Market demand
- Quick revenues resulting from existing retail channels
- Freedom to shape market without OEM control
- Product line diversification.
Mode and Terms: How to Proceed
- Non-exclusive licenses should be subject to later OEM licensing.
- Offer limited exclusivity on regional carve-outs.
- Increase regional size if possible, provided certain performance is met with guaranteed minimum royalties.
- Provide incentives for direct assistance in licensing to OEMs (for example, royalty income participation stemming from OEM licenses).
- With exhaustion of OEM licensing activity, offer standard licenses to aftermarket providers through media such as targeted publications or websites.
A Final Option
If licensing attempts run out of gas, Albert has at least one other road to explore. He could create a company to establish itself as an aftermarket supplier of motorcycle accessories.
This path is not simple, cheap or for the faint of heart. I strongly recommend professional help.
As a direct-to-market supplier, Albert will require capitalization for manufacturing, marketing, distribution and other business needs. If he doesn’t have personal funds, he’ll need venture or angel capital investments.
Operations profits will go to repay venture capitalization if needed, and finally, income for Albert.
Today’s lesson: With a well-researched strategy, licensing deals with aftermarket manufacturers and distributors can succeed. However, these deals are likely to be complicated and reach smaller consumer markets.
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About the Author
Will Jacques is President of Emanus, a consulting firm that works with entrepreneurs, early-stage, and small-/medium-sized businesses.