Should You Hire a Contract Manufacturer?

By Cliff Ennico

May 11, 2021 7 min read

"I'm a retired engineer who is spending his Golden Years designing new household products.

"I've obtained several patents for my inventions but haven't yet done anything with them. I've started getting emails from companies offering to take my patents and develop them into marketable products.

"The offers are tempting and appear to be low risk — I just assign my patent to them, they do all the work, and I just sit back and collect royalty payments each month.

"But of course that sounds like it's too good to be true. What are the rules for dealing with these kinds of companies, and how do I avoid getting ripped off?"

These types of operations have been around a long time and are known as contract manufacturers.

Traditionally, a contract manufacturer does the following:

— Licenses your patent.

— Develops a prototype and prepares your product for manufacture.

— Manufactures your product in whatever quantities you specify.

— Ships the product back to you.

— Bills you for the production costs plus a (hopefully) reasonable markup.

You take it from there. In a traditional contract manufacturer relationship, you handle all of the marketing, distribution and sales of the product, and order additional quantities of product from the manufacturer as needed.

Given that manufacturing has been on a long-term decline in the U.S., many contract manufacturers have gotten more creative and will offer a website on which your products will be purchased (if that's the case, make sure the manufacturer has good search engine optimization so customers will actually see your product when they search for it online). Some will even have a distribution network or an Amazon seller account, which will help get your product in front of customers.

But in my experience (and my clients'), most will not flog your product in the marketplace the way you or an experienced marketing firm would.

When I published my first book (if you think about it, book publishers are contract manufacturers of a sort), my editor told me something I have never forgotten: "Always remember, Cliff, it's our job as the publisher to get your books into the bookstores; it's your job as the author to get your books out of the bookstore." Translation: We will get your books out there, but you're the one who has to promote the Dickens out of them to get on bestseller lists.

Whenever you deal with any contract manufacturer, ask tough questions about what it will do to promote your product. If the manufacturer will only list your product on its website or in a catalogue, pass on the opportunity. If it is actively selling other products on Amazon, Walmart.com and other major retailing sites, that's a bit more promising.

If you feel comfortable with marketing your product yourself (for example, if you or your spouse have a marketing background or could partner with someone who does), ask the contract manufacturer if it will consider a joint venture with you. In that case, you would form a legal entity (usually a limited liability company), which the two of you would own 50/50 or 60/40 (in your favor). You would assign or license your patent to the entity, and the manufacturer would enter an exclusive supply agreement with the entity.

The manufacturer then makes and warehouses the product, while the legal entity handles all of the marketing, distribution and sales, referring product orders to the manufacturer for fulfillment. The manufacturer handles product returns, while the entity handles collection of delinquent accounts.

The manufacturer recoups its production and warehousing costs upfront, sometimes with a 10% to 20% markup, and whatever is left over goes to the joint venture entity. The entity then deducts its marketing and other costs, and the balance is split between you and the manufacturer based on your ownership percentages in the entity.

As to whether or not a particular contract manufacturer is reputable, the best approach is to look at its online reviews (for a list of online review sites, see https://smallbiztrends.com/2020/12/business-review-sites.html) and ask for references from other inventors who have trusted the manufacturer with their product. Be sure to ask the following:

— Has the company worked with products in your industry before?

— Can it provide you with advice/assistance with marketing?

— Is it familiar with 3D printing technology?

— Could it ramp up production quickly if your product becomes a hit?

Finding a contract manufacturer is a bit tricky these days, as virtually all of the large international trade shows that traditionally have matched inventors and manufacturers have been shut down during the pandemic, and the strained trading relationship between the United States and China isn't helping either.

To find a local manufacturer, search online for "(your state) contract manufacturer." Speak to local patent attorneys and patent agents (licensed to practice before the U.S. Patent and Trademark Office but not attorneys) and ask who their clients have worked with — to find these, contact your state bar association or visit https://www.uspto.gov/learning-and-resources/patent-and-trademark-practitioners/finding-patent-practitioner.

For a more global search, check out:

— us.kompass.com, a worldwide B2B manufacturer listing.

— www.made-in-china.com, for Chinese suppliers of components.

— www.mfg.com, a custom manufacturing marketplace.

— www.jobshop.com, for North American manufacturers.

Cliff Ennico ([email protected]) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our webpage at www.creators.com.

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