Licensing is the granting of a right to do something in return for a royalty payment. There can be a considerable initial cost and there will be a requirement for some experienced legal support to ensure the agreements are worded and implemented correctly. Licensing is not well understood in new and emerging markets. However, where it is recognised in more established export markets, it offers the opportunity to generate additional income.
Licensing is also more commonly used by companies who have new products or services that they wish to launch in international markets more quickly. Licensing allows a company to take a product to market without the expense of setting up locally and all the additional costs and risks involved.
Franchising is a form of licensing and occurs where a company already has a well-developed business model. Franchising is particularly popular in the USA.
The intellectual property (IP) rights owner (the licensor) should ensure they already have the required IP protection in the overseas markets they are targeting. This IP, which would include patents, trademarks, copyright or design rights, is what the licensee is paying for the right to use. Specialist support on intellectual property protection is available from the Intellectual Property Office.
Tips from our trade advisers
- develop a licensing strategy for the market and sector
- use a specialist lawyer to advise on and draw up the agreement
- consider the type of license that you are going to grant, for example, should it be exclusive or non exclusive, and should it be limited by territory
- consider if the licensee will be able to grant a sub-license to a third party
- insist on a non-disclosure agreement to ensure confidentiality
- agree on how payments for the license will operate, for example, there could be an initial license fee followed by clearly stated royalty payments
- provide for any on-going technical support in the agreement
- decide who will own any improvements in licensed technology
- state the duration of the license in the agreement, for example, 5 years
- specify circumstances where the license can be terminated early
To create a licensing agreement in an overseas market you will need to think about the following steps.
Step 1: Identify the opportunity for licensing
Establish if licensing is an option for your company and take steps to protect your intellectual property. As a first step, we advise you to speak with an intellectual property lawyer if you think you require IP protection when doing business. One way you could protect your IP is through taking out a patent, or by ensuring you have adequate legal protection for copyright and trade marks.
Carry out market research to help you select a market. You can find out more about how to conduct market research here. For licensing, look for evidence that the licensing model is likely to be successful.
Step 2: Find the ideal partners
Look for companies who are operating in the right market and sector. Look for evidence they will be a good fit for your business. For example, they may have similar or complimentary products and proven distribution channels. If there is more than one potential partner, draw up a list and carry out an analysis of who is likely to be the best fit for your business.
When you have identified a preferred partner, plan how you will approach them. Identify the right contact, and consider how you will pitch to them.
Step 3: Finalise the agreement
Ensure that you negotiate the agreement carefully with the licensee. Make sure that you discuss and clarify important points, such as how the licensee will develop the market. It will help the future relationship if there is an understanding that the agreement is fair, and if the partner is confident they will achieve the returns needed to justify your royalty payments.
You may want to explicitly state expectations of the licensee in terms of sales performance. This will provide criteria to measure the performance of the licensee, and legal grounds to terminate the agreement if they are not returning the expected amount of royalty payments.
It is advisable to seek specialist legal advice when drawing up and before signing a final agreement.
Step 4: Manage and support the licensee
Communication and support is important for the success of the ongoing relationship. For example, you should stay in communication with your partner about your marketing strategy to ensure you are taking advantage of any insights they can provide about the market they sell in.
You should visit the market regularly, as this will provide an opportunity to monitor and assess performance, and ensure that royalty payments are correctly declared.