Licensing: a path to new markets
It's the ultimate business marriage contract.
“Give and take, compromise, trusting partners” – essential elements of a long and happy marriage. Same with business partnerships, and nowhere more so than with an agreement to license the manufacture of products in a foreign jurisdiction.
Most experienced international traders know the value of partnerships for speedy and successful market entry. The more challenging the environment (different culture, language and business practice), the more interesting the partnership option becomes. It takes many forms: agency or distribution arrangement, franchise, joint venture or licence. The choice depends on many factors such as size of company, depth of technology involved, barriers to competitive entry, or import restrictions in the target market.
In the late 1950s the British company Pilkington Glass invented the “float” process, which revolutionized the manufacture of flat glass. They made a fortune licensing other glass manufacturers around the world, with carefully crafted agreements transferring the patented technology and ensuring – at least for a specific time – that licensees would not compete, and royalties would flow.
There is no reason why small and medium-sized companies with niche products and unique (and protected) technology should not also consider licensing as an appropriate route to move quickly into a new market. This should always involve a written contract under which the owner of technology, know-how, or intellectual property (patents, copyrights or trademarks) allows a licensee to use, make or sell copies of the original.
So what are the advantages? For the licensor: reliance on local (and possibly better) manufacturing capacity while retaining ownership of the intellectual property; speed of market entry; access to new and distant markets; even stopping an actual or potential infringer by bringing him on board; and above all, income that goes straight to the bottom line. For the licensee: access to established and protected technology, and the potential development of new and superior products.
Once initial trust has been built up, and both parties are on the same cultural wavelength and are a good fit, a formal agreement can be drawn up. This must be clear on all the minutiae, and it then should become a protective document in case of divorce. Here are some of the critical elements:
• Term. This needs to be reasonable and make sense for both parties, allowing for proper transfer of technology and training, and time for the licensee to get up to speed in the market – maybe three to five years, (longer if the investment is significant) with options to renew.
• Territory. It should be clearly specified to avoid disputes with other partners, and if exclusive, note it as such. Specify how enquiries/orders from adjacent markets are to be covered.
• Products/technology. Outline the details of what you’re transferring, including the intellectual property (patents, trademarks and copyrights), as well as the arrangements for dealing with infringements by third parties, the training of licensee’s employees, and any manufacturing set-up required. Similarly cover the designs and other specifications that will be provided and the requirements for the licensee in terms of brand image, labelling, packaging, manufacturing standards and quality control.
• Communication. It can make or break an agreement. Mutual trust should be built up throughout both organizations. The parties need to be clear about routine and regular interchange of information, and also have a “hot line” between senior management on both sides in case of an emergency. A “champion” of licensing operations might be useful.
• Sales targets. Sales expectations should be realistic. Make allowance for a start up period, and if possible include a three- to five-year sales plan as an appendix, based on research. Given the investment, include minimum targets and also some element of “stretch” looking forward.
• Royalties. Agree to the numbers up front, be realistic and ensure they’re acceptable to both parties. If one party “screws down” the other, the arrangement will fall apart. Whatever level is agreed, the actual numbers should be verifiable by an independent audit in case of dispute.
• Termination. This covers termination on the amicable conclusion of the agreement at term (what happens to IP, inventory, proprietary equipment), as well as on “ irretrievable breakdown” with an appropriate notice period, and non-compete guarantee.
• The small print. We all like to avoid lawyers, but in an agreement, which involves major commitments by both parties involving time and funds, it’s vital that everything be covered. In foreign jurisdictions it’s also important to ensure local regulations are respected. There are many templates available to guide the process: www.onecle.com gives a range of different agreements that might be drawn up. For something more detailed try www.stemcellnetwork.ca and get to the long license agreement template. For a detailed training manual try the World Intellectual Property Organization at www.wipo.int. As a last resort, google license (or licence) agreements for a wealth of other relevant information.
Hard work? Sure, but the deal should be as successful as a long term marriage, provided it’s “win-win” for both parties.
Mark Drake is former president of Electrovert Ltd. and the Canadian Exporters’ Association. E-mail email@example.com.
Comments? E-mail firstname.lastname@example.org.
This article appears in the Nov/Dec 2014 issue of PLANT.