New Zealand: Licensing to increase revenue and profit: Business Strategy

Last Updated: 23 December 2009
Article by Shona Foster

This article explains why licensing is a great way to increase both revenue and profit during a recession, and outlines the key strategic issues that you should consider before launching into licensing.

Licensing is a recession-friendly strategy

In the midst of a recession, licensing offers an effective way to grow your business for relatively little financial outlay and minimal additional risk.

Look around your business. It is quite likely that you have technologies or business techniques which would be of value to others. By licensing these to businesses that don't compete with you - perhaps in a different market or in a country in which you don't want to operate - you can generate exponential revenue growth without reducing your own competitive advantage.

Other businesses may see licensing from you as an attractive option because it allows them to adopt technology or knowledge that has already been tried and tested, with relatively little risk and without spending large amounts on development.

Before you think about the details of licensing, it is important to consider the best fit with your business strategy. This article outlines some of the key strategic issues that you need to think about at the outset.

Assessing commercialisation options: strategic considerations

Before starting to negotiate a licensing deal, it is essential to consider your own business and the relevant technology and business landscape. In particular, as a potential licensor you need to know and understand the following:

Your objectives

The nature of the licence must align with your overall business strategy. For example, suppose that you have developed a topical medicine and your business strategy and capability is limited to the human health products market. You might decide to retain all rights in relation to the human health market and licence your product to another party solely for the veterinary market.

Your technology or idea (including its benefits and limitations)

Understanding the true competitive advantages offered by your technology across a range of industries enables you to identify synergies with potential licensees.

The potential market

Each market has a different scope and scale, and different players. The biggest players in the market will not necessarily be the best licensees. Often a smaller, dynamic competitor will be more interested in picking up new products. Different markets also have different drivers. For example, the FMCG market is driven largely by distribution networks and shelf space agreements. Agricultural and dairy products, to use another example, will face considerable trade barriers if exporting into many overseas markets. These factors are critical when identifying licensees who can get products to market.

A licensor who is issuing a number of licences into various product markets will need to have some knowledge of each market in order to ensure the deal they obtain is fair.

The Value Chain

Following from the point above, an invention is not a business. Quite apart from the significant investment required to get a product ready for market, the licensee must have the capability and capacity to either take the product to the market, or have existing networks do so. In some cases, a market may not exist, in which case the licensee must have the marketing expertise to create the market. Very few products will sell themselves!

Consider which person in the value chain is the most appropriate as a licensee. For example, if your business has developed a software application that monitors energy use, you might consider licensing it to a software marketing company or licensing it directly to end users such as high-energy consuming businesses. The first option will tap into existing sales distribution networks and potentially enable the software to be bundled with other applications. The end-users in the second option, on the other hand, may not be interested unless the software is compatible with their existing operating systems and comes with appropriate levels of service and regular updates.

The business risks

Common risks include failing to retain key staff, currency fluctuations, changing technologies, competitors, etc. All of these factors need to be considered and allowed for when establishing the terms of the licence. Royalties which are stated in dollar terms (as opposed to percentage terms), even if inflation-adjusted, run the risk of currency fluctuations. In the past, many organisations have overcome this risk by stipulating that all transactions be in $US, although this is less predictable now. A better alternative is to use currency hedging. Many licence agreements will include non-solicitation clauses preventing the licensee from soliciting the licensor's key staff.

Tax implications of various options

This is a specialist area, and specialist advice should be sought. The tax position can seriously affect the ultimate value of the deal being struck.

Your BATNA (Best Alternative to a Negotiated Agreement

Always go into a negotiation knowing your alternatives and, in particular, your best alternative if you fail to reach an agreement. This allows you to reality-test all offers presented to you, and to consider your alternatives in an informed way.

Use negotiation to reassess your strategy

During the course of negotiations, new information will emerge and new possibilities may become apparent. Exploring the potential licensee's objectives, strategies and business structure (or as much as they are willing to disclose) will often throw up opportunities for mutual gain. To use a pie as an analogy, it may better to grow the pie between you than to spend all your negotiating energy arguing over your relative shares of the pie. Furthermore, if the licensee has a financial incentive to increase the market, this will ultimately increase the return to you as the licensor. So there is no substitute for being open-minded, asking open-ended questions, and listening to the answers.

And last but not least ... build your own team of experts

Licensing brings great rewards, but also includes a number of pitfalls and traps for beginners. Even the most experienced negotiators recognise the value of having good legal advisors who specialise in intellectual property licensing. Make sure you put a good team of experts around yourself before you start.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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