UK: Licensing – A Good Way To Grow

Last Updated: 27 July 2009
Article by Robert Sales

Robert Sales of Swindell & Pearson suggests that growing companies should include licensing in their strategic thinking, as a potential way of increasing revenue, obtaining revenue from new areas, and hence achieving growth without some of the pain this usually involves.

Licensing

Licensing usually entails a company allowing a third party to use one or more of its rights, and the third party pays for the privilege of using these rights.

Free Beer?

It may sound too good to be true, but effective licensing can come close to approaching this ideal. In licensing a company can seek rewards by allowing somebody else to work their rights, where and how the company presently cannot or does not work these rights themselves.

A good licence arrangement may provide a steady income stream for a company, for little effort on their part. This income can significantly assist a company in its growth.

Why license?

Aside from obtaining "free beer", there may be one or more markets out there which a company is unable to supply. This may be because the company is too small, too busy, may not have appropriate expertise, or doesn't have sufficient capacity, to supply a particular market. Alternatively, it may be a market which the company cannot supply satisfactorily, without significant investment in arranging distribution, local partners and the like. A licensee may already be established in this market, and may readily be able to add the company's products, services or other rights to their existing business in this market.

Another scenario is that the rights are in a field in which the company does not have sufficient knowledge and/or reputation. It may be possible that the company's rights are applicable in a field in which the company has no track record or experience.

It may be that a company cannot, or is not ready to, enter a particular geographical market. Accordingly, rights in that market could be licensed perhaps to a company established in that area, which may be a local partner.

Licensing can be carried out by all sizes of companies, and throughout their existence. Microsoft have recently launched a program to spin off its unused intellectual property, with the hope of generating licensing revenue from its unused innovations. IBM are famous for their extensive licensing activities. Licensing also takes place in many smaller companies.

What do you need to be able to license?

The usual rights to be licensed are intellectual property rights (IPRs) such as patents, designs, copyright, trade marks or know how. In view of this care must be taken when seeking to obtain these rights. Strategic thinking is necessary in deciding which types of protection to seek, how broad protection to seek, and geographically where to seek protection.

For instance, if a company knows it can only service the U.K. market, it may seek for a licensee for the U.S. market, and therefore protection should be sought in both the U.K. and U.S.

Turning to consider particular rights which may be licensed.

Lets share the big idea

Concepts are generally protected by patents, which can be granted for a wide range of inventions, as long as the invention is novel and inventive relative to previous arrangements. Ron Hickman became a multi millionaire by licensing the WORKMATE® to BLACK & DECKER®. Mr. Hickman struggled for many years in achieving his success, and also when necessary bringing legal proceedings against various infringers of his patent rights.

Most licensing of ideas is not so dramatic. Possible licensing scenarios include a start up U.K. firm making electronic testing equipment. Their new testing product has proved very successful and they are hard pressed to meet the demands in the U.K. and EU for this product. In view of this they have licensed an established U.S. company to make and sell the product in the U.S. This provides profits from a market they cannot fulfil themselves.

A West Country manufacturer of traffic cones has developed a new moulding process which helps to provide a stable base for their cones. This moulding process has a wide range of potential applications. They have already signed a licensing deal with a Northern Ireland firm which makes garden furniture, and negotiations are about to start with a Scottish manufacturer of children's toys, with a view to using the moulding process on their products. Again, this provides profits from a market they cannot fulfil themselves.

A grand design?

There are many instances of the licensing of designs. For instance men's suits and also pottery dinner sets bearing designs by Jeff Banks are available in our High Streets.

A wall paper manufacturer may turn to licensing their very successful designs for use on other products such as bed linen or general furnishings, for use as coordinated items, or stand alone ranges. In both cases, profits are being obtained from markets for which the licensor does not have manufacturing experience.

Copyright – how far can it be spread?

Again there are many instances of copyright being licensed. For example, the copyright in characters in films, television series and cartoons are widely licensed on diverse products such as yogurts, t-shirts, board games, footballs, bed linen etc. The income from such licensing deals can significantly supplement the income from the original film or other work, without the film company needing to establish themselves in these other markets.

Exploit the brand

A company's brand can be its most valued asset. The brand may be what attracts customers, and may provide a guarantee of quality, durability, value, exclusiveness, or reliability.

The goodwill in a brand can be taken into new areas by licensing. For example the well known and respected brand JCB®, originally known for agricultural and earth-moving equipment, has been taken by licensing into the field of power tools, lawnmowers and elsewhere, to provide the same message of quality to purchasers of these products.

An example of potential licensing would be when a company purchases the assets including the main trade mark of a well known brand in the baby care field. This mark has been used for over 100 years by this U.K. family firm which has now fallen on hard times, due in no small part to competition from the Far East.

The purchaser of the assets now intends to make only a small number of high quality premium products under the brand, which is where their expertise lies. This company also though intends licensing the trade mark on other products, still in the baby care field, but which will be made and sold by a foreign company, bearing the well known U.K. brand. Strict provisions have been put in place to ensure that the quality of the foreign made products will be appropriate to this esteemed U.K. brand. Thus, the licensor gains profits from markets which are outside their own expertise, by careful choice and control of a licensee.

Know How – tell others how to

Know how covers trade secrets such as recipes, process steps and conditions and the like. As the only protection for know how is confidentiality, care must always be exercised to retain this confidentiality. Once a secret has been lost it can never be regained.

An example of licensing here is the recipe of a particular biscuit. The recipe is licensed for manufacture abroad, and particularly for sale into the expatriate market in the U.S. who wish to purchase this special typically British biscuit. Strict provisions are provided in the licence to maintain the secrecy of the recipe, and also to ensure the quality of the product. The British manufacturer is able to gain profits from the ex-patriate market, without setting up overseas.

What you should be looking for in a licence

Where should it cover

This would normally be markets you are not active in, or those which could be penetrated much further by the licensee.

What should it cover

This could be products or services similar to your own, or could be restricted to products, services or activities away from your main activities.

What's in it for you?

Most commonly this is a royalty, which may be a fixed percentage or a fixed figure. This can vary dependent for instance on the volume of sales.

When negotiating a royalty figure it, it is always worth bearing in mind that 2% of a lot of sales, is usually more than 20% of a very small amount of sales. Therefore any royalties should aim to be realistic for both parties so as to enable significant sales to take place whilst providing an appropriate income for the right's owner.

advice is important.

Summary – don't miss out on a potential bonus

Licensing can provide growth in bringing in extra revenue, and especially from markets which a company may not be able to serve themselves. To be able to successfully license, it is necessary to have in place appropriate IP rights, covering what is wished to be licensed and where.

Therefore strategic thinking is required at the outset to decide how and where there is a potential for any new innovation, and whether one or more third parties may be required to fully develop and realise the potential of the innovation.

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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