How to license with a revenue-based model?

Licensing a platform is a terrific way to generate revenue. We struggled to gain an audience to our site and didn't have the funds to market as heavily as we would have wanted. In came the offers to license. Margins were tighter, but the exposure to new customers made a world of difference.

This is always a question of who wants whom more. I've seen deals where the percentage was in single digits. The thing is, I've seen both deals where a LICENSEE ended up with a single digit percentage and deals where a LICENSOR ended up with a single digit percentage. It all comes down to your ability to convince the other side that you are bringing in so much to the table that the other side should get a smaller piece of the pie. Essentially, this depends on these factors: - whether you are well-known in the industry; - whether the other side is well-known in the industry; - the level of uniqueness of your product (if you've developed another minor variation of a product that already exists on the market, chances are the distributor will want a larger piece of the pie); - your level of desperation (it's one thing when you partner up with someone else who will commercialize your product simply because you can make more money by investing your time building new stuff; it's another thing when you have no realistic way to commercialize the product yourself, and if you don't find someone who can do it for you quickly, you'll starve...) MOST IMPORTANTLY, no matter what number you agree to, make sure you read the contract extremely carefully. Contracts can create rights and contracts can destroy rights. Contracts are more powerful than any rights vested in you by IP laws. So, the bottom line is: - Know EXACTLY what you are trying to get out of your contract; - Get your contract reviewed by an experienced lawyer, but make sure you tell the lawyer what it is you're trying to get out of the contract. Lawyers are not going to create "the right deal" for you. We're not going to tell you whether you should be getting 9% or 90% of the revenue. We're going to make sure that you understand whether the contract you are about to sign reflects what you think the terms of the contract are. You're welcome to schedule a call if you would like to discuss this in more detail. Cheers, Andrei

Hi, What you're contemplating is a licensing model. It's like 'franchise lite.' There are several questions you need to answer for yourself before you go recruiting any licensees. For example, are there any business systems that will come with the franchise in addition to the brand name? How will you control the systems and guarantee the client experience? The more 'controlling' your agreement is, the more you may be deemed to be selling a franchise which introduces complicated compliance requirements. I've helped many others work out licensing schemes before. Arrange a call if you'd like to chat. Also, you should read Franchise Warnings. Available from Amazon. David Barnett

The question that pops up for me from your question is, "Why would you trust someone who isn't behaving like a partner?" How common is this situation, where a licensee declines to share buyer contract info with you? I'm guessing very infrequent from your description of "one" licensee behaving this way. If that is so, and the far more common situation is a licensee agreeing to share the end user contract data with you to have fully accurate revenue data, then I would simply screen out those potential licensees who won't cooperate and not work with them. If, however, your marketplace sees the resistance to sharing data as being more commonplace, I would review the structure of how your software is being delivered. The software licensing program could capture this revenue data so you wouldn't have to worry about trusting licensees. An example of a third party licensing program I've seen (to which I am not in any way affiliated) is https://www.licensecloud.com/ As another option, you could also dispense entirely with the idea of following licensees around and making sure they're telling you the truth about revenue. Restructure your billing system so you charge a profitable flat fee per end user, and leave it up to your licensees to sell the services for whatever they are able. This keeps you out of the business of looking over your licensees' shoulders and in my opinion is healthier in many ways over the medium and long term. Revenue models are tricky to calculate and many intelligent people will miss expensive cost factors on the road to developing a price that truly makes them money. I help businesses who have any kind of problem on the path of competently delivering a product or service to their customer. If you'd like to discuss this further, reply here and send me a message because I don't always check previous threads. Thanks, Jason

I am not a lawyer or an attorney and this is not "professional advice." Hire an accountant who is familiar with licensing. Stay away from the franchising route if you can: it's expensive, the lawyers are expensive, and you are open to attack from inside and out (franchisees and customers). I was a senior executive at an Inc. Top 1000 franchise firm and saw this from the inside--though we didn't have an issue with our franchisees, I saw plenty of franchisors who did. Learn about licensing. Figure out how to write the contract so you have control over some measurable variables, eg. customer count, revenues, # of complaints, etc. As long as the licensee remains in tolerance, they're fine, but if they go outside you drop them. You are going to have to invest in an attorney to create the boilerplate contract, and an accountant to manage the process (which you should probably do first.) Don't cheap out. You're protecting yourself here. BTW looks like Jeff Retchman in this thread could help you as well: https://clarity.fm/questions/1258/how-to-license-with-a-revenue-based-model