Michael Koss, CEO of Koss Corp., in Milwaukee, wanted to diversify his stereo-headphone-manufacturing company. The idea of licensing the $26-million company's brand name and logo was a natural. More unusual was Koss's willingness to structure a U.S.-based deal with a foreign partner, the $2-billion Dutch trading company Hagemeyer.

"This seemed a good way to generate royalty income in the short run and cement a strategic partnership that could lead, over the long run, to joint ventures that would build on Hagemeyer's European distribution strength," Koss says. And despite the European connection, Koss simply reports its licensing fees as royalty income, taxable at standard U.S. rates.

Although Koss negotiated the deal himself, for advice he consulted others in his industry who had negotiated licensing deals. Here's how Koss's deal works: Hagemeyer has the right to design and manufacture a range of products that don't directly compete with Koss's, including portable stereos, tabletop stereos, camcorders, and VCRs, for sale in North and South America under the Koss Electronics name. In return Koss will receive a minimum payment of $2.5 million over the next six years if Hagemeyer achieves just 50% of its projected sales goals. Hagemeyer's U.S. offices will report sales figures to Michael Koss monthly, and will regularly share warranty lists, which will give Koss new customer leads. To ensure quality, Koss has veto power over all product drawings, engineering specifications, first-product samples, and final products.

"If Hagemeyer achieves its sales goals, we'll receive $5 million," he notes, "and if it exceeds them, we're positioned to receive much, much more." -- Jill Andresky Fraser

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