An experienced small business owner contacted Ground Floor Partners about a promising
licensing agreement he was considering. He had met an entrepreneur the year before who told
him about an innovative software and projection system that facilitated virtual walkthroughs of
architectural designs for residential, commercial and industrial properties, to-scale. The
entrepreneur had prepared a licensing arrangement that showed — on paper at least — huge profit
potential. The proposed agreement suggested an initial investment of at least $500,000, plus
required recurring royalty payments to the licensor equal to 7% of annual revenues. The owner
was inclined to sign on the dotted line, but his wife had serious concerns about the whole deal.
Solution/Results
The couple hired us to perform due diligence on the entrepreneur, the market opportunity. and
the licensing agreement terms. We reviewed all of the available marketing documents, email and
written correspondence, websites and contracts, and soon discovered several major problems.
First of all, despite the entrepreneur’s claims, the software and projection system were not
unique. In fact, there were several competitors with nearly identical systems. Second, we
prepared several pro-forma projections which showed that the $500,000 suggested investment
was based on extremely optimistic assumptions. We concluded that a more realistic estimate of
the initial investment needed was $1,000,000, which was more than our clients wanted to risk.
Third, we reviewed the draft contract terms carefully, and concluded that our clients would
receive virtually nothing in return for their obligatory 7% annual royalty payment. In other
words, they would enter into a multi-year contract where they would be forced to pay out large
sums of money for little, if any, reward. Fourth, we reviewed the chain of correspondence with
the entrepreneur, and concluded he was not nearly as sophisticated or successful as he claimed.
In fact, it appeared the contract could quickly lead to disputes because it was so poorly written.
Based on our due diligence, we urged our clients to walk away from this deal. They agreed, and
thanked us for potentially saving them years of headaches and millions of dollars in losses.